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Were Hedge Funds Right About salesforce.com, inc. (CRM)?

Abigail Fisher
·6 min read

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 salesforce.com, inc. (NYSE:CRM).

Is salesforce.com, inc. (NYSE:CRM) a superb stock to buy now? The smart money was selling. The number of long hedge fund bets were trimmed by 10 recently. salesforce.com, inc. (NYSE:CRM) was in 107 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 117. Our calculations also showed that CRM ranked 17th 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.

Brad Gerstner Altimeter Capital
Brad Gerstner Altimeter Capital

Brad Gerstner of Altimeter Capital

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 take a look at the new hedge fund action encompassing salesforce.com, inc. (NYSE:CRM).

What does smart money think about salesforce.com, inc. (NYSE:CRM)?

At the end of the second quarter, a total of 107 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from one quarter earlier. By comparison, 82 hedge funds held shares or bullish call options in CRM a year ago. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Ken Fisher's Fisher Asset Management has the biggest position in salesforce.com, inc. (NYSE:CRM), worth close to $2.1555 billion, accounting for 2.1% of its total 13F portfolio. Sitting at the No. 2 spot is Brad Gerstner of Altimeter Capital Management, with a $590.8 million position; the fund has 12.5% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish contain Lone Pine Capital, David Goel and Paul Ferri's Matrix Capital Management and Chase Coleman's Tiger Global Management LLC. In terms of the portfolio weights assigned to each position TenCore Partners allocated the biggest weight to salesforce.com, inc. (NYSE:CRM), around 16.3% of its 13F portfolio. TOMS Capital is also relatively very bullish on the stock, designating 15.25 percent of its 13F equity portfolio to CRM.

Because salesforce.com, inc. (NYSE:CRM) has experienced declining sentiment from hedge fund managers, it's safe to say that there exists a select few hedgies that decided to sell off their entire stakes heading into Q3. Interestingly, Aaron Cowen's Suvretta Capital Management dropped the biggest stake of the 750 funds watched by Insider Monkey, totaling about $226.4 million in stock. Eashwar Krishnan's fund, Tybourne Capital Management, also cut its stock, about $208.6 million worth. These transactions are interesting, as total hedge fund interest dropped by 10 funds heading into Q3.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as salesforce.com, inc. (NYSE:CRM) but similarly valued. These stocks are SAP SE (NYSE:SAP), Chevron Corporation (NYSE:CVX), Abbott Laboratories (NYSE:ABT), Eli Lilly and Company (NYSE:LLY), ASML Holding N.V. (NASDAQ:ASML), Novo Nordisk A/S (NYSE:NVO), and NIKE, Inc. (NYSE:NKE). This group of stocks' market caps resemble CRM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SAP,16,1253641,1 CVX,50,1585417,-3 ABT,67,3504346,5 LLY,51,2161323,8 ASML,25,1961320,-5 NVO,24,3294368,0 NKE,71,2603242,-9 Average,43.4,2337665,-0.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 43.4 hedge funds with bullish positions and the average amount invested in these stocks was $2338 million. That figure was $9769 million in CRM's case. NIKE, Inc. (NYSE:NKE) is the most popular stock in this table. On the other hand SAP SE (NYSE:SAP) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks salesforce.com, inc. (NYSE:CRM) is more popular among hedge funds. Our overall hedge fund sentiment score for CRM is 89.4. 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 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on CRM as the stock returned 38% since the end of June (through 10/16) 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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