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Were Hedge Funds Right About Roku, Inc. (ROKU)?

Abigail Fisher
·6 min read

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Roku, Inc. (NASDAQ:ROKU).

Is Roku, Inc. (NASDAQ:ROKU) worth your attention right now? The best stock pickers were taking an optimistic view. The number of long hedge fund bets advanced by 6 recently. Roku, Inc. (NASDAQ:ROKU) was in 41 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ROKU isn't 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.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 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.

CITADEL INVESTMENT GROUP
CITADEL INVESTMENT GROUP

Ken Griffin of Citadel Investment Group

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. Now we're going to check out the fresh hedge fund action encompassing Roku, Inc. (NASDAQ:ROKU).

How have hedgies been trading Roku, Inc. (NASDAQ:ROKU)?

At second quarter's end, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the first quarter of 2020. On the other hand, there were a total of 33 hedge funds with a bullish position in ROKU a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

The largest stake in Roku, Inc. (NASDAQ:ROKU) was held by Citadel Investment Group, which reported holding $220 million worth of stock at the end of September. It was followed by PEAK6 Capital Management with a $77 million position. Other investors bullish on the company included Alyeska Investment Group, Greenvale Capital, and D E Shaw. In terms of the portfolio weights assigned to each position Ogborne Capital allocated the biggest weight to Roku, Inc. (NASDAQ:ROKU), around 10.18% of its 13F portfolio. Empirical Capital Partners is also relatively very bullish on the stock, setting aside 9.67 percent of its 13F equity portfolio to ROKU.

Consequently, specific money managers were leading the bulls' herd. Alyeska Investment Group, managed by Anand Parekh, created the largest position in Roku, Inc. (NASDAQ:ROKU). Alyeska Investment Group had $60.7 million invested in the company at the end of the quarter. Bruce Emery's Greenvale Capital also made a $60.6 million investment in the stock during the quarter. The other funds with brand new ROKU positions are Jacob Mitchell's Antipodes Partners, Peter S. Park's Park West Asset Management, and Seth Wunder's Black-and-White Capital.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Roku, Inc. (NASDAQ:ROKU) but similarly valued. These stocks are Boston Properties, Inc. (NYSE:BXP), EPAM Systems Inc (NYSE:EPAM), Teradyne, Inc. (NASDAQ:TER), Dover Corporation (NYSE:DOV), Rollins, Inc. (NYSE:ROL), International Paper Company (NYSE:IP), and The Hartford Financial Services Group Inc (NYSE:HIG). This group of stocks' market values are closest to ROKU's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BXP,36,539228,7 EPAM,28,482887,1 TER,34,1354430,6 DOV,40,683970,9 ROL,29,577262,4 IP,29,238219,0 HIG,39,917896,2 Average,33.6,684842,4.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.6 hedge funds with bullish positions and the average amount invested in these stocks was $685 million. That figure was $451 million in ROKU's case. Dover Corporation (NYSE:DOV) is the most popular stock in this table. On the other hand EPAM Systems Inc (NYSE:EPAM) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Roku, Inc. (NASDAQ:ROKU) is more popular among hedge funds. Our overall hedge fund sentiment score for ROKU is 90. 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. 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 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on ROKU as the stock returned 92.2% since the end of June (through 10/23) 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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