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Were Hedge Funds Right About Souring On Electronic Arts Inc. (EA)?

Abigail Fisher

Does Electronic Arts Inc. (NASDAQ:EA) represent a good buying opportunity at the moment? Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Electronic Arts Inc. (NASDAQ:EA) shareholders have witnessed a decrease in hedge fund sentiment lately. Our calculations also showed that EA isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

EA_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a gander at the recent hedge fund action regarding Electronic Arts Inc. (NASDAQ:EA).

How are hedge funds trading Electronic Arts Inc. (NASDAQ:EA)?

At Q2's end, a total of 59 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in EA over the last 16 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

COATUE MANAGEMENT

More specifically, D E Shaw was the largest shareholder of Electronic Arts Inc. (NASDAQ:EA), with a stake worth $344.7 million reported as of the end of March. Trailing D E Shaw was Two Sigma Advisors, which amassed a stake valued at $302 million. SRS Investment Management, AQR Capital Management, and Coatue Management were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Electronic Arts Inc. (NASDAQ:EA) has experienced a decline in interest from the smart money, logic holds that there lies a certain "tier" of hedge funds that slashed their full holdings last quarter. Interestingly, Gabriel Plotkin's Melvin Capital Management dumped the biggest stake of the "upper crust" of funds watched by Insider Monkey, totaling an estimated $164.7 million in stock. Steve Cohen's fund, Point72 Asset Management, also dumped its stock, about $151.6 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 2 funds last quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Electronic Arts Inc. (NASDAQ:EA) but similarly valued. These stocks are Ingersoll-Rand Plc (NYSE:IR), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Paychex, Inc. (NASDAQ:PAYX), and Credit Suisse Group AG (NYSE:CS). This group of stocks' market valuations are similar to EA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IR,40,2101164,1 ALXN,44,2636589,9 PAYX,34,862198,13 CS,11,217760,-3 Average,32.25,1454428,5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.25 hedge funds with bullish positions and the average amount invested in these stocks was $1454 million. That figure was $2606 million in EA's case. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is the most popular stock in this table. On the other hand Credit Suisse Group AG (NYSE:CS) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Electronic Arts Inc. (NASDAQ:EA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately EA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on EA were disappointed as the stock returned -3.4% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market in Q3.

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

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