How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Activision Blizzard, Inc. (NASDAQ: ATVI) and determine whether hedge funds had an edge regarding this stock.
Is Activision Blizzard, Inc. (NASDAQ: ATVI) an exceptional investment right now? Investors who are in the know were selling. The number of long hedge fund bets fell by 4 in recent months after reaching its all time high at the end of March. Our calculations also showed that ATVI still managed to rank #20 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.
John Armitage of Egerton Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out ideas like this under-the-radar stock to identify the next tenbagger. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let’s take a peek at the fresh hedge fund action regarding Activision Blizzard, Inc. (NASDAQ: ATVI).
What does smart money think about Activision Blizzard, Inc. (NASDAQ:ATVI)?
At the end of the second quarter, a total of 97 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. On the other hand, there were a total of 46 hedge funds with a bullish position in ATVI a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Citadel Investment Group, managed by Ken Griffin, holds the biggest position in Activision Blizzard, Inc. (NASDAQ:ATVI). Citadel Investment Group has a $407.4 million position in the stock, comprising 0.1% of its 13F portfolio. The second most bullish fund manager is Alkeon Capital Management, managed by Panayotis Takis Sparaggis, which holds a $232.9 million position; the fund has 0.6% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions contain John Armitage’s Egerton Capital Limited, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Renaissance Technologies. In terms of the portfolio weights assigned to each position SoMa Equity Partners allocated the biggest weight to Activision Blizzard, Inc. (NASDAQ:ATVI), around 6.88% of its 13F portfolio. Atreides Management is also relatively very bullish on the stock, setting aside 6.75 percent of its 13F equity portfolio to ATVI.
Because Activision Blizzard, Inc. (NASDAQ:ATVI) has faced bearish sentiment from hedge fund managers, it’s easy to see that there was a specific group of funds that decided to sell off their positions entirely in the second quarter. At the top of the heap, Alex Sacerdote’s Whale Rock Capital Management dumped the biggest position of all the hedgies monitored by Insider Monkey, valued at about $117.5 million in stock. James Dinan’s fund, York Capital Management, also dropped its stock, about $11.3 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 4 funds in the second quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Activision Blizzard, Inc. (NASDAQ:ATVI) but similarly valued. These stocks are CME Group Inc (NASDAQ: CME), Micron Technology, Inc. (NASDAQ: MU), Chubb Limited (NYSE: CB), Ecolab Inc. (NYSE: ECL), Takeda Pharmaceutical Company Limited (NYSE: TAK), U.S. Bancorp (NYSE: USB), and Applied Materials, Inc. (NASDAQ: AMAT). All of these stocks’ market caps match ATVI’s market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CME,60,2336649,-2 MU,84,4285777,-10 CB,40,1288157,7 ECL,46,2099678,8 TAK,18,790266,-4 USB,48,6299135,-3 AMAT,58,2461809,2 Average,50.6,2794496,-0.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 50.6 hedge funds with bullish positions and the average amount invested in these stocks was $2794 million. That figure was $3565 million in ATVI’s case. Micron Technology, Inc. (NASDAQ: MU) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE: TAK) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Activision Blizzard, Inc. (NASDAQ:ATVI) is more popular among hedge funds. Our overall hedge fund sentiment score for ATVI is 89.3. 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 gained 28.2% in 2020 through August 24th and still beat the market by 20.6 percentage points. Unfortunately ATVI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ATVI were disappointed as the stock returned 9.5% since the end of the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.