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Were Hedge Funds Right About Flocking Into Zynga Inc (ZNGA) ?

Abigail Fisher

"The end to the U.S. Government shutdown, reports of progress on China-U.S. trade talks, and the Federal Reserve’s confirmation that it did not plan further interest rate hikes in 2019 allayed investor fears and drove U.S. markets substantially higher in the first quarter of the year. Global markets followed suit pretty much across the board delivering what some market participants described as a “V-shaped” recovery," This is how Evermore Global Value summarized the first quarter in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.

Zynga Inc (NASDAQ:ZNGA) investors should be aware of an increase in enthusiasm from smart money recently. Our calculations also showed that ZNGA isn't among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

Bruce Kovner, Caxton Associates LP

We're going to take a look at the key hedge fund action surrounding Zynga Inc (NASDAQ:ZNGA).

How are hedge funds trading Zynga Inc (NASDAQ:ZNGA)?

At the end of the first quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the previous quarter. On the other hand, there were a total of 20 hedge funds with a bullish position in ZNGA a year ago. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

ZNGA_june2019

The largest stake in Zynga Inc (NASDAQ:ZNGA) was held by Citadel Investment Group, which reported holding $173.5 million worth of stock at the end of March. It was followed by Cadian Capital with a $117.5 million position. Other investors bullish on the company included D E Shaw, Black-and-White Capital, and AQR Capital Management.

Consequently, some big names were leading the bulls' herd. Tiger Legatus Capital, managed by Jesse Ro, created the most valuable position in Zynga Inc (NASDAQ:ZNGA). Tiger Legatus Capital had $10.7 million invested in the company at the end of the quarter. Principal Global Investors's Columbus Circle Investors also initiated a $9 million position during the quarter. The following funds were also among the new ZNGA investors: Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Jim Simons's Renaissance Technologies, and Bruce Kovner's Caxton Associates LP.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Zynga Inc (NASDAQ:ZNGA) but similarly valued. We will take a look at Anaplan, Inc. (NYSE:PLAN), JetBlue Airways Corporation (NASDAQ:JBLU), Janus Henderson Group plc (NYSE:JHG), and ICU Medical, Inc. (NASDAQ:ICUI). This group of stocks' market caps resemble ZNGA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PLAN,22,625121,1 JBLU,26,498119,-5 JHG,12,145597,-3 ICUI,15,329228,-5 Average,18.75,399516,-3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $400 million. That figure was $799 million in ZNGA's case. JetBlue Airways Corporation (NASDAQ:JBLU) is the most popular stock in this table. On the other hand Janus Henderson Group plc (NYSE:JHG) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Zynga Inc (NASDAQ:ZNGA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on ZNGA as the stock returned 17.6% during the same period 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.

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

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