Hedge Funds Piled On This Stock Right Before Its 30% Surge

Reymerlyn Martin

Sat, Jun 22, 2019, 7:17 PM

The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May as this time China pivoted and Trump put more pressure on China by increasing tariffs. Hedge funds' top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 18.7% through May 30th, vs. a gain of 12.1% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Zillow Group Inc (NASDAQ:Z), and what that likely means for the prospects of the company and its stock.

Is Zillow Group Inc (NASDAQ:Z) going to take off soon? The smart money is buying. The number of bullish hedge fund positions advanced by 10 lately. Valiant Capital's Chris Hansen pitched Zillow as a long investment in early May 2019 at this year's Sohn Conference. It is very likely that we will see another round of increases in the number of hedge funds with Zillow positions heading into Q3.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Let's check out the new hedge fund action surrounding Zillow Group Inc (NASDAQ:Z).

How have hedgies been trading Zillow Group Inc (NASDAQ:Z)?

Heading into the second quarter of 2019, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 43% from the fourth quarter of 2018. By comparison, 25 hedge funds held shares or bullish call options in Z a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Zillow Group Inc (NASDAQ:Z) was held by SRS Investment Management, which reported holding $153 million worth of stock at the end of March. It was followed by Valiant Capital with a $121.6 million position. Other investors bullish on the company included Valiant Capital, Ancient Art (Teton Capital), and Slate Path Capital.

As aggregate interest increased, specific money managers have been driving this bullishness. Slate Path Capital, managed by David Greenspan, assembled the biggest position in Zillow Group Inc (NASDAQ:Z). Slate Path Capital had $34.7 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also made a $22.8 million investment in the stock during the quarter. The following funds were also among the new Z investors: Howard Marks's Oaktree Capital Management, Howard Marks's Oaktree Capital Management, and Steve Cohen's Point72 Asset Management.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Zillow Group Inc (NASDAQ:Z) but similarly valued. These stocks are Tripadvisor Inc (NASDAQ:TRIP), Columbia Sportswear Company (NASDAQ:COLM), Roku, Inc. (NASDAQ:ROKU), and Cimarex Energy Co (NYSE:XEC). This group of stocks' market caps are similar to Z's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRIP,27,1354971,-2 COLM,32,359364,8 ROKU,33,505452,7 XEC,30,1100137,2 Average,30.5,829981,3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $830 million. That figure was $623 million in Z's case. Roku, Inc. (NASDAQ:ROKU) is the most popular stock in this table. On the other hand Tripadvisor Inc (NASDAQ:TRIP) is the least popular one with only 27 bullish hedge fund positions. Zillow Group Inc (NASDAQ:Z) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Hedge funds were also right about betting on Z as the stock returned 30.7% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness (Interestingly, hedge funds' favorite stock in this group, Roku, performed even better than Zillow since the end of Q1).

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

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