Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through November 22nd. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 52% and 49% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 34.7% in 2019 (through November 22) and outperformed the broader market benchmark by 8.5 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Cognizant Technology Solutions Corporation (NASDAQ:CTSH) was in 40 hedge funds' portfolios at the end of September. CTSH shareholders have witnessed an increase in enthusiasm from smart money lately. There were 33 hedge funds in our database with CTSH positions at the end of the previous quarter. Our calculations also showed that CTSH 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_221324" align="aligncenter" width="450"] Donald Yacktman of Yacktman Asset Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a peek at the recent hedge fund action encompassing Cognizant Technology Solutions Corporation (NASDAQ:CTSH).
How are hedge funds trading Cognizant Technology Solutions Corporation (NASDAQ:CTSH)?
At Q3's end, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in CTSH over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Generation Investment Management, managed by David Blood and Al Gore, holds the number one position in Cognizant Technology Solutions Corporation (NASDAQ:CTSH). Generation Investment Management has a $786.8 million position in the stock, comprising 5.6% of its 13F portfolio. Sitting at the No. 2 spot is Pzena Investment Management, led by Richard S. Pzena, holding a $514.4 million position; the fund has 2.8% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish contain Ken Griffin's Citadel Investment Group, Cliff Asness's AQR Capital Management and Donald Yacktman's Yacktman Asset Management. In terms of the portfolio weights assigned to each position Generation Investment Management allocated the biggest weight to Cognizant Technology Solutions Corporation (NASDAQ:CTSH), around 5.55% of its portfolio. Indus Capital is also relatively very bullish on the stock, setting aside 4.75 percent of its 13F equity portfolio to CTSH.
With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Kensico Capital, managed by Michael Lowenstein, established the biggest position in Cognizant Technology Solutions Corporation (NASDAQ:CTSH). Kensico Capital had $56.6 million invested in the company at the end of the quarter. Matthew Tewksbury's Stevens Capital Management also made a $8.5 million investment in the stock during the quarter. The following funds were also among the new CTSH investors: Michael Kharitonov and Jon David McAuliffe's Voleon Capital, David Harding's Winton Capital Management, and Ray Dalio's Bridgewater Associates.
Let's now take a look at hedge fund activity in other stocks similar to Cognizant Technology Solutions Corporation (NASDAQ:CTSH). We will take a look at eBay Inc (NASDAQ:EBAY), The Hershey Company (NYSE:HSY), Autodesk, Inc. (NASDAQ:ADSK), and China Unicom (Hong Kong) Limited (NYSE:CHU). This group of stocks' market valuations are similar to CTSH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EBAY,53,3488246,6 HSY,33,1103825,6 ADSK,45,2728142,-11 CHU,8,65922,2 Average,34.75,1846534,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 34.75 hedge funds with bullish positions and the average amount invested in these stocks was $1847 million. That figure was $2369 million in CTSH's case. eBay Inc (NASDAQ:EBAY) is the most popular stock in this table. On the other hand China Unicom (Hong Kong) Limited (NYSE:CHU) is the least popular one with only 8 bullish hedge fund positions. Cognizant Technology Solutions Corporation (NASDAQ:CTSH) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Hedge funds were also right about betting on CTSH, though not to the same extent, as the stock returned 5.2% during the fourth quarter (through 11/22) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
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