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Were Hedge Funds Right About Crowding Into Okta, Inc. (OKTA)?

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Reymerlyn Martin
·6 min read
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Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Okta, Inc. (NASDAQ:OKTA).

Okta, Inc. (NASDAQ:OKTA) was in 60 hedge funds' portfolios at the end of June. The all time high for this statistics is 52. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. OKTA investors should be aware of an increase in hedge fund interest of late. There were 48 hedge funds in our database with OKTA holdings at the end of March. Our calculations also showed that OKTA isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Noam Gottesman GLG Partners
Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we're going to view the new hedge fund action surrounding Okta, Inc. (NASDAQ:OKTA).

How have hedgies been trading Okta, Inc. (NASDAQ:OKTA)?

At the end of June, a total of 60 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 25% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in OKTA over the last 20 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

More specifically, Whale Rock Capital Management was the largest shareholder of Okta, Inc. (NASDAQ:OKTA), with a stake worth $408 million reported as of the end of September. Trailing Whale Rock Capital Management was Alkeon Capital Management, which amassed a stake valued at $319.8 million. SCGE Management, Zevenbergen Capital Investments, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position SQN Investors allocated the biggest weight to Okta, Inc. (NASDAQ:OKTA), around 7.21% of its 13F portfolio. SCGE Management is also relatively very bullish on the stock, dishing out 5.9 percent of its 13F equity portfolio to OKTA.

As industrywide interest jumped, some big names have been driving this bullishness. Hitchwood Capital Management, managed by James Crichton, created the most outsized position in Okta, Inc. (NASDAQ:OKTA). Hitchwood Capital Management had $20 million invested in the company at the end of the quarter. Noam Gottesman's GLG Partners also made a $13 million investment in the stock during the quarter. The other funds with brand new OKTA positions are Highbridge Capital Management, Ryan Caldwell's Chiron Investment Management, and Dipak Patel's Alight Capital.

Let's now take a look at hedge fund activity in other stocks similar to Okta, Inc. (NASDAQ:OKTA). We will take a look at HP Inc. (NYSE:HPQ), McKesson Corporation (NYSE:MCK), Public Service Enterprise Group Incorporated (NYSE:PEG), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Credit Suisse Group AG (NYSE:CS), Nokia Corporation (NYSE:NOK), and Zimmer Biomet Holdings Inc (NYSE:ZBH). This group of stocks' market valuations match OKTA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HPQ,35,1106876,-8 MCK,61,1958790,-2 PEG,31,649382,-3 ALXN,57,3577628,1 CS,14,134420,3 NOK,26,218711,3 ZBH,62,752893,11 Average,40.9,1199814,0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.9 hedge funds with bullish positions and the average amount invested in these stocks was $1200 million. That figure was $1991 million in OKTA's case. Zimmer Biomet Holdings Inc (NYSE:ZBH) is the most popular stock in this table. On the other hand Credit Suisse Group AG (NYSE:CS) is the least popular one with only 14 bullish hedge fund positions. Okta, Inc. (NASDAQ:OKTA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for OKTA is 87.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on OKTA as the stock returned 21.8% since the end of Q2 (through 10/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.

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