Within 45 days of the end of a quarter, hedge funds have to report their portfolio holdings to the SEC, and these 13F filings can give investors a sneak peak into what the big kids on the market are buying.
Goldman Sachs wrote in a report this week that following the smart money has been a winning strategy over the past 18 years. Goldman found that since 2002, the stocks that have seen the largest number of new hedge fund investors in a quarter outperformed other stocks in their sectors by an average of 0.52 percentage point in the following quarter.
The firm reviewed the filings of the portfolios of 859 hedge funds that manage $2.3 trillion worth of assets to identify those stocks that hedge funds have been snapping up recently.
Overall, hedge funds are holding rather pricey stocks right now.
“Our Hedge Fund VIP basket currently carries a 33% price-to-earnings premium to the broad S&P 500 (25x vs. 19x), the largest on record,” Goldman Sachs analysts wrote in their report.
However, according to the firm, its basket of 50 stocks—which it calls the Very Important Positions basket—has returned 24% from the start of the fourth quarter of 2019 until last week. The S&P 500 has risen 14% in the same time frame, for comparison.
Among those stocks that Goldman has identified as the most popular among hedge funds are growth names like Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), Google-parent Alphabet (NASDAQ: GOOGL, GOOG), Microsoft (NASDAQ: MSFT), and Netflix (NASDAQ: NFLX).
But the stock bought by the most number of hedge funds last quarter might surprise you: Uber Technologies (NYSE: UBER).
And it appears to have been a good call. The ride-hailing pioneer’s stock struggled after its IPO last year, but it has since rebounded and had gained 36% this year until this week when the stock fell alongside the market.
Still, even after taking a big hit this week, Uber shares are still up nearly 16% year-to-date.
Uber reported fourth quarter earnings earlier this month, posting a smaller loss than Wall Street expected and pushed up its forecast for when it expects to start making a profit.
“2019 was a transformational year for Uber and I’m gratified by our progress, steadily delivering against the commitments we’ve made to our shareholders on our path to profitability,” said Uber CEO Dara Khosrowshahi in an earnings statement. “We recognize that the ear of growth at all costs is over [in] a world where investors increasingly demand not just growth, but profitable growth.”
The company said it expects to be profitable by the end of this year, while it had previously said that it anticipated reaching profitability sometime in 2021. And Wall Street praised the news.
Guggenheim analyst Jake Fuller reiterated his Buy rating for Uber and upped his price target for the stock from $45 to $50 – 45% higher than the current price.
“Growth investors typically view growth-for-margin swap as a negative, but UBER is not your typical growth story,” Fuller wrote in a note. “In this case, we argue that the swap is a plus in light of ongoing doubts that UBER can be profitable and the idea that we are still looking at healthy growth.”
Meanwhile, RBC Capital Markets analyst Mark Mahaney said that Uber is the tech company that could provide the most upside this year, given that investor sentiment was excessively negative. Mahaney added that Uber’s core ride-hailing segment is a “very good” business as evidenced by its gross bookings increasing 28% year-over-year to $18.1 billion in its fiscal fourth quarter.
“There’s a lot of dislocation and fear in the stock,” Mahaney said. “If [Uber management] can continue to reduce losses and maintain healthy revenue growth rates, I think the Uber shares can materially go up higher.”