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 Alibaba Group Holding Limited (NYSE:BABA).
Is Alibaba Group Holding Limited (NYSE:BABA) ready to rally soon? Money managers were becoming less hopeful. The number of long hedge fund positions dropped by 21 in recent months. Alibaba Group Holding Limited (NYSE:BABA) was in 135 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 170. Our calculations also showed that BABA ranked 9th among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 156 hedge funds in our database with BABA holdings at the end of December.
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. Hedge funds have more than $3.5 trillion in assets under management, so you can't expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds' moves today.
Scott Ferguson of Sachem Head Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, advertising technology one of the fastest growing industries right now, so we are checking out stock pitches like this under-the-radar adtech stock that can deliver 10x gains. We go through lists like the 10 best hydrogen fuel cell 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. Keeping this in mind let's analyze the key hedge fund action regarding Alibaba Group Holding Limited (NYSE:BABA).
Do Hedge Funds Think BABA Is A Good Stock To Buy Now?
At first quarter's end, a total of 135 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the fourth quarter of 2020. The graph below displays the number of hedge funds with bullish position in BABA over the last 23 quarters. With hedgies' capital changing hands, there exists an "upper tier" of key hedge fund managers who were boosting their holdings meaningfully (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 most valuable position in Alibaba Group Holding Limited (NYSE:BABA), worth close to $3.1519 billion, accounting for 2.2% of its total 13F portfolio. Sitting at the No. 2 spot is Citadel Investment Group, led by Ken Griffin, holding a $2.3696 billion call position; 0.6% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that hold long positions contain Chris Rokos's Rokos Capital Management, Chase Coleman's Tiger Global Management LLC and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Portland Hill Asset Management allocated the biggest weight to Alibaba Group Holding Limited (NYSE:BABA), around 21.24% of its 13F portfolio. Joho Capital is also relatively very bullish on the stock, designating 20.1 percent of its 13F equity portfolio to BABA.
Seeing as Alibaba Group Holding Limited (NYSE:BABA) has experienced a decline in interest from the aggregate hedge fund industry, it's easy to see that there is a sect of hedge funds who sold off their positions entirely heading into Q2. Intriguingly, Dan Loeb's Third Point dropped the largest investment of the "upper crust" of funds monitored by Insider Monkey, valued at close to $325.8 million in stock. Robert Pitts's fund, Steadfast Capital Management, also sold off its stock, about $293.4 million worth. These moves are interesting, as total hedge fund interest was cut by 21 funds heading into Q2.
Let's go over hedge fund activity in other stocks similar to Alibaba Group Holding Limited (NYSE:BABA). These stocks are Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), Berkshire Hathaway Inc. (NYSE:BRK-B), JPMorgan Chase & Co. (NYSE:JPM), Visa Inc (NYSE:V), Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), and Mastercard Incorporated (NYSE:MA). This group of stocks' market valuations resemble BABA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TSM,76,10870661,4 BRK-B,111,19880791,1 JPM,111,5253689,-1 V,164,26588103,-2 JNJ,81,6913373,0 WMT,58,5881223,-12 MA,151,17097200,-3 Average,107.4,13212149,-1.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 107.4 hedge funds with bullish positions and the average amount invested in these stocks was $13212 million. That figure was $15498 million in BABA's case. Visa Inc (NYSE:V) is the most popular stock in this table. On the other hand Walmart Inc. (NYSE:WMT) is the least popular one with only 58 bullish hedge fund positions. Alibaba Group Holding Limited (NYSE:BABA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BABA is 82.1. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 17.2% in 2021 through June 11th and beat the market again by 3.3 percentage points. Unfortunately BABA wasn't nearly as popular as these 5 stocks and hedge funds that were betting on BABA were disappointed as the stock returned -6.7% since the end of March (through 6/11) 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 many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.