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Were Hedge Funds Right About Zillow Group Inc (Z)?

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In this article we are going to use hedge fund sentiment as a tool and determine whether Zillow Group Inc (NASDAQ:Z) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Zillow Group Inc (NASDAQ:Z) investors should pay attention to a decrease in hedge fund interest recently. Zillow Group Inc (NASDAQ:Z) was in 82 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 83. There were 83 hedge funds in our database with Z holdings at the end of December. Our calculations also showed that Z isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.


Philippe Laffont of Coatue Management

At Insider Monkey, we scour multiple sources to uncover 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 EV 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. With all of this in mind we're going to view the latest hedge fund action regarding Zillow Group Inc (NASDAQ:Z).

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

At the end of the first quarter, a total of 82 of the hedge funds tracked by Insider Monkey were long this stock, a change of -1% from the fourth quarter of 2020. On the other hand, there were a total of 37 hedge funds with a bullish position in Z a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is Z A Good Stock To Buy?
Is Z A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey, Catherine D. Wood's ARK Investment Management has the largest position in Zillow Group Inc (NASDAQ:Z), worth close to $1.3006 billion, corresponding to 2.6% of its total 13F portfolio. The second largest stake is held by SRS Investment Management, managed by Karthik Sarma, which holds a $947 million position; the fund has 14.9% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism consist of Philippe Laffont's Coatue Management, D. E. Shaw's D E Shaw and Nancy Zevenbergen's Zevenbergen Capital Investments. In terms of the portfolio weights assigned to each position 0 allocated the biggest weight to Zillow Group Inc (NASDAQ:Z), around 42.74% of its 13F portfolio. 0 is also relatively very bullish on the stock, dishing out 14.91 percent of its 13F equity portfolio to Z.

Since Zillow Group Inc (NASDAQ:Z) has experienced declining sentiment from the aggregate hedge fund industry, it's safe to say that there is a sect of hedgies who were dropping their full holdings heading into Q2. Interestingly, Renaissance Technologies said goodbye to the biggest stake of the 750 funds tracked by Insider Monkey, totaling close to $85.2 million in stock. Israel Englander's fund, Millennium Management, also sold off its stock, about $46.4 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 1 funds heading into Q2.

Let's also examine hedge fund activity in other stocks similar to Zillow Group Inc (NASDAQ:Z). These stocks are Alexandria Real Estate Equities Inc (NYSE:ARE), FleetCor Technologies, Inc. (NYSE:FLT), Vulcan Materials Company (NYSE:VMC), EPAM Systems Inc (NYSE:EPAM), EXACT Sciences Corporation (NASDAQ:EXAS), Paycom Software Inc (NYSE:PAYC), and Nokia Corporation (NYSE:NOK). All of these stocks' market caps resemble Z's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ARE,27,434248,13 FLT,39,1455035,-5 VMC,48,1317475,4 EPAM,24,424015,-8 EXAS,41,2408537,1 PAYC,46,969848,11 NOK,21,352915,2 Average,35.1,1051725,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.1 hedge funds with bullish positions and the average amount invested in these stocks was $1052 million. That figure was $5733 million in Z's case. Vulcan Materials Company (NYSE:VMC) is the most popular stock in this table. On the other hand Nokia Corporation (NYSE:NOK) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Zillow Group Inc (NASDAQ:Z) is more popular among hedge funds. Our overall hedge fund sentiment score for Z is 83.6. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 25.8% in 2021 through August 6th and still beat the market by 6.7 percentage points. Unfortunately Z wasn't nearly as popular as these 5 stocks and hedge funds that were betting on Z were disappointed as the stock returned -22% since the end of the first quarter (through 8/6) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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