Stock Notes: Hedge Funds’ Groupthink

Hedge Funds’ Groupthink

Kevin from Biotech for FIRE has an interesting insider’s perspective of the hedge fund industry. In a recent blog post, he writes about the structural problems at hedge funds. A few points I found interesting:

  • A lot of people in the industry are nice and hard working people. 😇
  • Analysts receive the same training. This means analysts will look at EBIDTA growth, revenue growth, P/E, etc.
  • As a result, this leads to financial consensus that overlooks technicals.
  • Hedge funds fires professionals over 2-3 months of bad performance. As a result, contrarian ideas are a risky proposition as it takes more than 3 months to realize.

As I look back investing in companies like Square and Tesla, it was a bumpy ride. It is frustrating investing in innovative companies. To these analysts, a new way of doing things is a fantasy. This is because it is difficult to grasp how a new process or technology will translate to a shift in the marketplace. And it is after this shift is when analysts realize the change.

Long story short, retail investors have an advantage investing in innovation.

Bitcoin (GBTC)

I’ll just leave this here. 😄 Companies are beginning to add Bitcoin to their balance sheets. It may be the belief that the US dollar is beginning to weaken.

Cloudflare (NET)

Cloudflare’s earnings announcement is on Thursday, February 11. I am interested in the following:

  • Sustained 50% CAGR in revenue (+$287M in Q3 2020)
  • Sustained 68% CAGR of enterprise customer base (+736 in Q3 2020)
  • Maintain healthy gross margins (77.3% in Q3 2020)
  • Improved net cash flow from operations (+$2M in Q3 2020)
  • Increased adoption in their Cloudflare One enterprise product
  • Increased adoption of their Workers developers product

Additional information can be found on their investor’s relations website.