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Were Hedge Funds Right About Piling Into Zoom Video Communications (ZM)?

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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Zoom Video Communications, Inc. (NASDAQ:ZM).

Is Zoom Video Communications, Inc. (NASDAQ:ZM) worth your attention right now? The smart money was buying. The number of long hedge fund bets improved by 3 in recent months. Zoom Video Communications, Inc. (NASDAQ:ZM) was in 59 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic was previously 56. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ZM isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

Today there are a lot of signals market participants employ to grade their holdings. A couple of the best signals are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the top picks of the elite investment managers can trounce the S&P 500 by a significant amount (see the details here). Also, our monthly newsletter's portfolio of long stock picks returned 197% since March 2017 (through March 2021) and beat the S&P 500 Index by 124 percentage points. You can download a sample issue of this newsletter on our website .

Billionaire David Siegel's Top 10 Stock Picks
Billionaire David Siegel's Top 10 Stock Picks

David Siegel of Two Sigma Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we're going to view the recent hedge fund action regarding Zoom Video Communications, Inc. (NASDAQ:ZM).

Do Hedge Funds Think ZM Is A Good Stock To Buy Now?

At Q4's end, a total of 59 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in ZM a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

Is ZM A Good Stock To Buy?
Is ZM A Good Stock To Buy?

According to Insider Monkey's hedge fund database, Hillhouse Capital Management, managed by Lei Zhang, holds the most valuable position in Zoom Video Communications, Inc. (NASDAQ:ZM). Hillhouse Capital Management has a $1.0056 billion position in the stock, comprising 8% of its 13F portfolio. Sitting at the No. 2 spot is Coatue Management, led by Philippe Laffont, holding a $848.5 million position; 3.2% of its 13F portfolio is allocated to the company. Some other professional money managers with similar optimism contain Renaissance Technologies, Chase Coleman's Tiger Global Management LLC and John Overdeck and David Siegel's Two Sigma Advisors. In terms of the portfolio weights assigned to each position Hillhouse Capital Management allocated the biggest weight to Zoom Video Communications, Inc. (NASDAQ:ZM), around 8% of its 13F portfolio. First Growth Capital Management is also relatively very bullish on the stock, dishing out 7.2 percent of its 13F equity portfolio to ZM.

There weren't any hedge funds initiating brand new positions in the stock during the fourth quarter.

Let's go over hedge fund activity in other stocks similar to Zoom Video Communications, Inc. (NASDAQ:ZM). These stocks are The Estee Lauder Companies Inc (NYSE:EL), Intuitive Surgical, Inc. (NASDAQ:ISRG), General Electric Company (NYSE:GE), Rio Tinto Group (NYSE:RIO), Diageo plc (NYSE:DEO), GlaxoSmithKline plc (NYSE:GSK), and Stryker Corporation (NYSE:SYK). This group of stocks' market values match ZM's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EL,51,3593398,5 ISRG,49,1802145,-1 GE,69,5684620,24 RIO,26,1711997,3 DEO,23,667041,4 GSK,30,1742036,-1 SYK,44,3222907,-4 Average,41.7,2632021,4.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.7 hedge funds with bullish positions and the average amount invested in these stocks was $2632 million. That figure was $6002 million in ZM's case. General Electric Company (NYSE:GE) is the most popular stock in this table. On the other hand Diageo plc (NYSE:DEO) is the least popular one with only 23 bullish hedge fund positions. Zoom Video Communications, Inc. (NASDAQ:ZM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ZM is 77.1. 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 slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and beat the market again by 1.6 percentage points. Unfortunately ZM wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ZM were disappointed as the stock returned -5.3% since the end of December (through 4/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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

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