New Hedge Funds Are Betting On MicroStrategy Incorporated (MSTR)

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Reymerlyn Martin

Updated Sun, Dec 9, 2018, 5:24 PM

Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 30 stock picks easily bested the broader market, at 6.7% compared to 2.6%, despite there being a few duds in there like Facebook (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.

MicroStrategy Incorporated (NASDAQ:MSTR) investors should be aware of an increase in activity from the world's largest hedge funds of late. MSTR was in 25 hedge funds' portfolios at the end of the third quarter of 2018. There were 20 hedge funds in our database with MSTR holdings at the end of the previous quarter. Our calculations also showed that MSTR isn't 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 the 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 18 percentage points since May 2014 through December 3, 2018 (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 go over the key hedge fund action regarding MicroStrategy Incorporated (NASDAQ:MSTR).

How are hedge funds trading MicroStrategy Incorporated (NASDAQ:MSTR)?

At the end of the third quarter, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 25% from the previous quarter. On the other hand, there were a total of 23 hedge funds with a bullish position in MSTR at the beginning of this year. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in MicroStrategy Incorporated (NASDAQ:MSTR) was held by Eminence Capital, which reported holding $57.6 million worth of stock at the end of September. It was followed by GLG Partners with a $26.9 million position. Other investors bullish on the company included D E Shaw, Echo Street Capital Management, and Laurion Capital Management.

Consequently, key hedge funds were breaking ground themselves. Laurion Capital Management, managed by Benjamin A. Smith, created the biggest position in MicroStrategy Incorporated (NASDAQ:MSTR). Laurion Capital Management had $14 million invested in the company at the end of the quarter. Jonathan Barrett and Paul Segal's Luminus Management also made a $4.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace's Marshall Wace LLP, Matthew Hulsizer's PEAK6 Capital Management, and Peter Muller's PDT Partners.

Let's now review hedge fund activity in other stocks similar to MicroStrategy Incorporated (NASDAQ:MSTR). We will take a look at Nexa Resources S.A. (NYSE:NEXA), Skyline Champion Corporation (NYSE:SKY), Sonos, Inc. (NASDAQ:SONO), and Virtusa Corporation (NASDAQ:VRTU). This group of stocks' market caps are similar to MSTR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NEXA,9,20541,1 SKY,23,539433,8 SONO,10,25396,10 VRTU,16,66452,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $163 million. That figure was $232 million in MSTR's case. Skyline Champion Corporation (NYSE:SKY) is the most popular stock in this table. On the other hand Nexa Resources S.A. (NYSE:NEXA) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks MicroStrategy Incorporated (NASDAQ:MSTR) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

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

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