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Were Hedge Funds Right About Cutting Their Netflix, Inc. (NFLX) Exposure?

Abigail Fisher

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Netflix, Inc. (NASDAQ:NFLX) and determine whether the smart money was really smart about this stock.

Netflix, Inc. (NASDAQ:NFLX) was in 109 hedge funds' portfolios at the end of the first quarter of 2020. NFLX investors should be aware of a decrease in activity from the world's largest hedge funds lately. There were 114 hedge funds in our database with NFLX holdings at the end of the previous quarter. Our calculations also showed that NFLX ranks 16th among the 30 most popular stocks among hedge funds (click for Q1 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_731899" align="aligncenter" width="398"] David Tepper of Appaloosa Management LP[/caption]

David Tepper Appaloosa Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's review the key hedge fund action regarding Netflix, Inc. (NASDAQ:NFLX).

What have hedge funds been doing with Netflix, Inc. (NASDAQ:NFLX)?

At Q1's end, a total of 109 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NFLX over the last 18 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, SRS Investment Management, managed by Karthik Sarma, holds the most valuable position in Netflix, Inc. (NASDAQ:NFLX). SRS Investment Management has a $1.3573 billion position in the stock, comprising 29.5% of its 13F portfolio. Sitting at the No. 2 spot is Fisher Asset Management, managed by Ken Fisher, which holds a $1.2184 billion position; 1.5% of its 13F portfolio is allocated to the stock. Other professional money managers that hold long positions contain Daniel Sundheim's D1 Capital Partners, Andreas Halvorsen's Viking Global and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position SRS Investment Management allocated the biggest weight to Netflix, Inc. (NASDAQ:NFLX), around 29.49% of its 13F portfolio. Matrix Capital Management is also relatively very bullish on the stock, designating 19.2 percent of its 13F equity portfolio to NFLX.

Seeing as Netflix, Inc. (NASDAQ:NFLX) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there was a specific group of hedge funds who were dropping their positions entirely heading into Q4. Intriguingly, Ryan Frick and Oliver Evans's Dorsal Capital Management dropped the largest stake of the "upper crust" of funds tracked by Insider Monkey, worth close to $72 million in stock, and Robert Pitts's Steadfast Capital Management was right behind this move, as the fund said goodbye to about $60.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 5 funds heading into Q4.

Let's also examine hedge fund activity in other stocks similar to Netflix, Inc. (NASDAQ:NFLX). We will take a look at NVIDIA Corporation (NASDAQ:NVDA), Exxon Mobil Corporation (NYSE:XOM), Comcast Corporation (NASDAQ:CMCSA), and China Mobile Limited (NYSE:CHL). This group of stocks' market values resemble NFLX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NVDA,95,4127764,16 XOM,65,1295305,2 CMCSA,83,5538665,-4 CHL,11,449753,-1 Average,63.5,2852872,3.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 63.5 hedge funds with bullish positions and the average amount invested in these stocks was $2853 million. That figure was $13648 million in NFLX's case. NVIDIA Corporation (NASDAQ:NVDA) is the most popular stock in this table. On the other hand China Mobile Limited (NYSE:CHL) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Netflix, Inc. (NASDAQ:NFLX) is more popular among hedge funds. 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 13.3% in 2020 through June 25th but still managed to beat the market by 16.8 percentage points. Hedge funds were also right about betting on NFLX, though not to the same extent, as the stock returned 24.1% in Q2 (through June 25th) and outperformed the market as well.

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

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