Is Alphabet (GOOGL) A Good Stock To Buy According To Hedge Funds?

Reymerlyn Martin

Sat, Jun 1, 2019, 9:15 AM

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 750 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Alphabet Inc (NASDAQ:GOOGL) in this article.

Alphabet Inc (NASDAQ:GOOGL) investors should pay attention to an increase in enthusiasm from smart money of late. Our calculations also showed that GOOGL ranks 4th among the 30 most popular stocks among hedge funds.

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.

We're going to take a look at the fresh hedge fund action encompassing Alphabet Inc (NASDAQ:GOOGL).

What does the smart money think about Alphabet Inc (NASDAQ:GOOGL)?

At Q1's end, a total of 147 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 1% from the fourth quarter of 2018. On the other hand, there were a total of 124 hedge funds with a bullish position in GOOGL 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 boosting their holdings significantly (or already accumulated large positions).

Among these funds, Fisher Asset Management held the most valuable stake in Alphabet Inc (NASDAQ:GOOGL), which was worth $1381.7 million at the end of the first quarter. On the second spot was Citadel Investment Group which amassed $1014.4 million worth of shares. Moreover, AQR Capital Management, Diamond Hill Capital, and Glenview Capital were also bullish on Alphabet Inc (NASDAQ:GOOGL), allocating a large percentage of their portfolios to this stock.

Now, key hedge funds have been driving this bullishness. OZ Management, managed by Daniel S. Och, assembled the most outsized call position in Alphabet Inc (NASDAQ:GOOGL). OZ Management had $107.5 million invested in the company at the end of the quarter. John Hempton's Bronte Capital also made a $35.1 million investment in the stock during the quarter. The following funds were also among the new GOOGL investors: Mark Kingdon's Kingdon Capital, Eric W. Mandelblatt and Gaurav Kapadia's Soroban Capital Partners, and Clint Carlson's Carlson Capital.

Let's also examine hedge fund activity in other stocks similar to Alphabet Inc (NASDAQ:GOOGL). These stocks are Alphabet Inc (NASDAQ:GOOG), Berkshire Hathaway Inc. (NYSE:BRK-B), Facebook Inc (NASDAQ:FB), and Alibaba Group Holding Limited (NYSE:BABA). All of these stocks' market caps match GOOGL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GOOG,133,13597514,-8 BRK-B,91,20086059,4 FB,176,18349790,15 BABA,117,13936754,4 Average,129.25,16492529,3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 129.25 hedge funds with bullish positions and the average amount invested in these stocks was $16493 million. That figure was $11115 million in GOOGL's case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand Berkshire Hathaway Inc. (NYSE:BRK-B) is the least popular one with only 91 bullish hedge fund positions. Alphabet Inc (NASDAQ:GOOGL) is not the most popular stock in this group but that's only because of Facebook. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately GOOGL wasn't nearly as successful as these 20 stocks and hedge funds that were betting on GOOGL were disappointed as the stock returned -4.7% during the same period and underperformed the market. We believe this is a temporary glitch. Google has been among hedge funds' top 10 holdings consistently since we started tracking this statistics 7 years ago and the stock nearly quadrupled during this period. Hedge funds still believe Alphabet is still a good stock to buy.

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

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