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Industry Analysis

2018’s Top Alpha Stocks

Netflix, Icahn Enterprises, Amazon, Microsoft, and Twenty-First Century Fox were a few of the standouts from a highly volatile year.

Raheem Shahid
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The world laid out an unwelcome door mat for Santa in 2018 with the worst Christmas Eve performance ever in the 121-year history of the Dow Jones Industrial Average (DJIA).  What caused this steep decline, heralded by losses beginning in October? The China-US trade war, multiple Federal Reserve interest rate hikes, and rising global geopolitical uncertainty were the primary catalysts that drove downward movement in the markets during the fourth quarter. This marked the first year in history that the market ended with a loss after three positive quarters.

That said—there were a few standouts in this highly volatile year. Using the Novus Hedge Fund Universe (HFU), we were able to identify and track the top five names that were the biggest alpha contributors for hedge funds last year: Netflix, Icahn Enterprises, Amazon, Microsoft, and Twenty-First Century Fox. While not immune to the rough and tumble fourth quarter sell-off, these names were able to finish the year with positive alpha generation for hedge funds.

We consider market & sector contribution to be the relative contribution, or beta, in the portfolio, while security selection & trading contribution make up the alpha. (For more information, see here.)

The HFU is comprised of over 1,000 hedge fund manager portfolios vetted by Novus senior research analysts. It is a subset of the Novus Public Ownership Database containing over 10,000 historical portfolios built from regulatory filings around the globe. All the included indices have been simulated using daily P&L and adjusted for corporate actions while accounting for the lag associated with public filings.

Netflix (Security Selection: 21.37 bps)

Netflix represents 0.22% of the total HFU portfolio with a 42% share decline over the course of the year.

As a stalwart member of the Facebook, Apple, Amazon, Netflix and Alphabet’s Google (FAANG) family, analyst projections early in 2018 called for a stock increase of 40% . Price targets were raised multiple times after each of the first two successful quarters. When subscriber and revenue expectations fell short in second quarter earnings, the stock price plummeted. That trend was exacerbated by the overall decline in market conditions toward the end of the year.

The final result? Netflix stock virtually matched initial performance projections with a 39% increase from year end 2017 to the same period in 2018.

Netflix is also a highly liquid stock, ending the year with a crowdedness of 0.69, down from 0.77 at the start of 2018. Hedge funds dominated the owner list, generating not only a high percentage of Average Daily Volume (ADV) but also swelling the number of owners with over 130 funds represented.

The largest holders were SRS Investment Management, Tiger Global Management, and Coatue Capital, with 3.32, 2.16, and 1.7 million shares respectively. In the third quarter, all three of these managers decreased their holdings.

Icahn Enterprises (Security Selection: 21.32 bps)

Less well-known among hedge funds than Netflix, Icahn Enterprises is an American conglomerate that is 95% owned by founder Carl Icahn. The stock had a bumpy start to 2018 after disclosure of an SEC investigation, but soared to a high of $77 per share by mid-year.

Hedge funds owned a total of total of 319 million shares—this status remained stable throughout 2018. Since the majority of the stake, comprised of approximately 175 million shares, is owned by Icahn Associates Corporation and board chairman Carl Icahn, this was an unsurprising outcome.

Microsoft (Security Selection: 20.89 bps)

Another popular tech stock facing high expectations from the market, Microsoft, led by CEO Satya Nadella, is owned by 290 hedge funds. This represents even higher fund ownership than Amazon. Contrary to Amazon, Microsoft experienced an increase in hedge fund holdings in 2018, from 259 million to 300 million shares by September 2018.

Who led the pack? Lone Pine Capital, TCI Fund Management, and Tiger Global Management each have about 13 million shares. September 2018 saw an increase of 1.2 million shares in Lone Pine holdings whereas TCI and Tiger decreased their positions.

Microsoft has a crowdedness of 0.84 and has a position size of 1.2% in the HFU portfolio. It contributed a cumulative 0.17% to the HFU portfolio.

Amazon (Security Selection: 20.79 bps)

With a loyal consumer army of over 60 million of the wealthiest American households, Amazon is an integral part of the urban economy. Amazon has such a stranglehold on US wallets that competitors would become insolvent in a futile effort to catch up.

It is no surprise that Amazon is a hedge fund darling and one of the most widely owned stocks, with 251 managers invested with a crowdedness score of 0.7. The high number of owners is offset by the even steeper hedge fund representation at 295% ADV, which makes the stock less crowded. Amazon has a high P/E ratio of 95.1.

Hedge funds own approximately 13 million Amazon shares, after a decline in March 2018 where the total shrunk from roughly 15 million shares. As of year-end, Tiger Global Management, D.E. Shaw and Adage Capital Management were the biggest owners.

FOXA (Security Selection: 14.98 bps)

Twenty-First Century Fox, Inc. was the subject of a tug of war in 2018, as Disney and Comcast seesawed back and forth throughout the twelve months in a heated battle to buy the organization. The year kicked off with an offer from Comcast that was withdrawn and then resubmitted as an aggressive all-cash bid for Fox compared with an all-stock Disney bid.

Disney then made a counter-offer of 71.3 billion comprised of an equal stock and cash split. This number represented an increase of ten dollars per share over their previous offer, and three dollars more than the Comcast bid. After an overwhelmingly positive response from shareholders, the Disney offer was accepted. The deal is expected to close by March 2019, with Fox to be renamed ‘New Fox’.

Hedge funds increased their Fox holdings from 231 million shares to 313 million in June 2018, leading to a price increase from 38.55 to 49.69 in one month. The price has been holding in the mid-forties since then. Fox crowdedness rose along with share prices, from 0.83 to 0.92 in March 2018.  A total of 101 hedge funds own shares.

Fox is one of the few positive stocks listed under communication. With the sector in the doldrums, Fox produced a respectable alpha of 15bps.

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