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Were Hedge Funds Right About Farfetch Limited (FTCH)?

Abigail Fisher

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds' and successful investors' positions as of the end of the first quarter. You can find articles about an individual hedge fund's trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Farfetch Limited (NYSE:FTCH) based on that data and determine whether they were really smart about the stock.

Farfetch Limited (NYSE:FTCH) shareholders have witnessed a decrease in hedge fund interest lately. FTCH was in 22 hedge funds' portfolios at the end of March. There were 27 hedge funds in our database with FTCH positions at the end of the previous quarter. Our calculations also showed that FTCH isn't 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.

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 58 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.

[caption id="attachment_792409" align="aligncenter" width="393"] Brad Gerstner of Altimeter Capital[/caption]

Brad Gerstner Altimeter Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind we're going to take a look at the fresh hedge fund action regarding Farfetch Limited (NYSE:FTCH).

How have hedgies been trading Farfetch Limited (NYSE:FTCH)?

Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FTCH over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Tybourne Capital Management was the largest shareholder of Farfetch Limited (NYSE:FTCH), with a stake worth $126.1 million reported as of the end of September. Trailing Tybourne Capital Management was Tremblant Capital, which amassed a stake valued at $105.5 million. Miller Value Partners, Altimeter Capital Management, and Keywise Capital Management 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 Keywise Capital Management allocated the biggest weight to Farfetch Limited (NYSE:FTCH), around 7.63% of its 13F portfolio. Tremblant Capital is also relatively very bullish on the stock, earmarking 6.64 percent of its 13F equity portfolio to FTCH.

Since Farfetch Limited (NYSE:FTCH) has experienced declining sentiment from the entirety of the hedge funds we track, it's safe to say that there exists a select few hedge funds that decided to sell off their positions entirely last quarter. At the top of the heap, Israel Englander's Millennium Management sold off the biggest position of the 750 funds tracked by Insider Monkey, comprising about $8.3 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund said goodbye to about $5.1 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 5 funds last quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Farfetch Limited (NYSE:FTCH) but similarly valued. These stocks are Spirit Realty Capital Inc (NYSE:SRC), Medallia, Inc. (NYSE:MDLA), PVH Corp (NYSE:PVH), and Cannae Holdings, Inc. (NYSE:CNNE). This group of stocks' market caps are closest to FTCH's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SRC,18,76385,-8 MDLA,20,237596,-2 PVH,18,346896,-11 CNNE,20,240727,-11 Average,19,225401,-8 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $225 million. That figure was $401 million in FTCH's case. Medallia, Inc. (NYSE:MDLA) is the most popular stock in this table. On the other hand Spirit Realty Capital Inc (NYSE:SRC) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Farfetch Limited (NYSE:FTCH) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on FTCH as the stock returned 118.6% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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