Did hedge funds trade Microsoft Corporation (NASDAQ:MSFT) correctly recently? Our database shows that hedge funds were taking some chips off the table during the second quarter as the number of bullish hedge fund bets dropped by 13. However, Microsoft Corporation (NASDAQ:MSFT) was still in 222 hedge funds' portfolios at the end of June. Our calculations also showed that MSFT ranked #2 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Bruce Kovner of Caxton Associates LP
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. With all of this in mind let's analyze the recent hedge fund action encompassing Microsoft Corporation (NASDAQ:MSFT).
How have hedgies been trading Microsoft Corporation (NASDAQ:MSFT)?
At the end of June, a total of 222 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MSFT over the last 20 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Microsoft Corporation (NASDAQ:MSFT) was held by Fisher Asset Management, which reported holding $4447.3 million worth of stock at the end of September. It was followed by Eagle Capital Management with a $2883.4 million position. Other investors bullish on the company included Arrowstreet Capital, Tiger Global Management LLC, and AQR Capital Management. In terms of the portfolio weights assigned to each position Joho Capital allocated the biggest weight to Microsoft Corporation (NASDAQ:MSFT), around 42.97% of its 13F portfolio. Skye Global Management is also relatively very bullish on the stock, earmarking 17.41 percent of its 13F equity portfolio to MSFT.
Since Microsoft Corporation (NASDAQ:MSFT) has witnessed bearish sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of money managers that decided to sell off their positions entirely in the second quarter. At the top of the heap, Bruce Kovner's Caxton Associates LP cut the biggest position of all the hedgies monitored by Insider Monkey, totaling an estimated $82.8 million in stock. Scott Bessent's fund, Key Square Capital Management, also dumped its stock, about $78.1 million worth. These transactions are important to note, as total hedge fund interest dropped by 13 funds in the second quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Microsoft Corporation (NASDAQ:MSFT) but similarly valued. We will take a look at Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), Alphabet Inc (NASDAQ:GOOG), Facebook Inc (NASDAQ:FB), Alibaba Group Holding Limited (NYSE:BABA), Berkshire Hathaway Inc. (NYSE:BRK-B), and Visa Inc (NYSE:V). All of these stocks' market caps are similar to MSFT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMZN,248,43217853,-3 GOOGL,157,13533499,-10 GOOG,144,14761874,-3 FB,210,25222524,-3 BABA,154,24386257,-13 BRK-B,107,15633556,-8 V,154,17010420,-3 Average,167.7,21966569,-6.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 167.7 hedge funds with bullish positions and the average amount invested in these stocks was $21967 million. That figure was $38737 million in MSFT's case. Amazon.com, Inc. (NASDAQ:AMZN) is the most popular stock in this table. On the other hand Berkshire Hathaway Inc. (NYSE:BRK-B) is the least popular one with only 107 bullish hedge fund positions. Microsoft Corporation (NASDAQ:MSFT) is not the most popular stock in this group but that's only because Amazon is the #1 stock among hedge funds. Our overall hedge fund sentiment score for MSFT is 97.8 (out of 100). 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. This is a very bullish signal because historically stocks with similar hedge fund sentiment scores outperformed the market. 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 beat the market by another 19.7 percentage points. Unfortunately MSFT wasn't nearly as successful as the rest of these 10 stocks and hedge funds that were betting on MSFT were slightly disappointed as the stock returned 8.2% since the end of June (through 10/16) and underperformed the market. However, Microsoft has been a top 3 hedge fund stock for a very long time and MSFT investors enjoyed a nearly 40% return this year, beating the market by a large margin. Overall, we can say that hedge funds were right about MSFT.
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Disclosure: None. This article was originally published at Insider Monkey.