Did Hedge Funds Make The Right Call On Tyler Technologies, Inc. (TYL) ?
We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Tyler Technologies, Inc. (NYSE:TYL) and determine whether hedge funds skillfully traded this stock.
Tyler Technologies, Inc. (NYSE:TYL) investors should pay attention to an increase in enthusiasm from smart money recently. TYL was in 30 hedge funds' portfolios at the end of the first quarter of 2020. There were 21 hedge funds in our database with TYL positions at the end of the previous quarter. Our calculations also showed that TYL isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_26340" align="aligncenter" width="400"]
Ken Griffin of Citadel Investment Group[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind we're going to take a glance at the latest hedge fund action regarding Tyler Technologies, Inc. (NYSE:TYL).
What does smart money think about Tyler Technologies, Inc. (NYSE:TYL)?
Heading into the second quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 43% from the previous quarter. By comparison, 31 hedge funds held shares or bullish call options in TYL a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
More specifically, Praesidium Investment Management Company was the largest shareholder of Tyler Technologies, Inc. (NYSE:TYL), with a stake worth $135.6 million reported as of the end of September. Trailing Praesidium Investment Management Company was RGM Capital, which amassed a stake valued at $74.2 million. Bares Capital Management, Stockbridge Partners, and Columbus Circle Investors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Praesidium Investment Management Company allocated the biggest weight to Tyler Technologies, Inc. (NYSE:TYL), around 10.97% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, setting aside 6.9 percent of its 13F equity portfolio to TYL.
With a general bullishness amongst the heavyweights, some big names were leading the bulls' herd. Stockbridge Partners, managed by Sharlyn C. Heslam, established the most outsized position in Tyler Technologies, Inc. (NYSE:TYL). Stockbridge Partners had $26.1 million invested in the company at the end of the quarter. Neal Nathani and Darren Dinneen's Totem Point Management also initiated a $13.5 million position during the quarter. The other funds with brand new TYL positions are Greg Poole's Echo Street Capital Management, Cliff Asness's AQR Capital Management, and Brad Dunkley and Blair Levinsky's Waratah Capital Advisors.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Tyler Technologies, Inc. (NYSE:TYL) but similarly valued. These stocks are Sun Communities Inc (NYSE:SUI), Pioneer Natural Resources Company (NYSE:PXD), Invitation Homes Inc. (NYSE:INVH), and Ryanair Holdings plc (NASDAQ:RYAAY). This group of stocks' market caps are closest to TYL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SUI,28,323201,-3 PXD,40,534807,-13 INVH,27,562992,-6 RYAAY,22,550561,0 Average,29.25,492890,-5.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $493 million. That figure was $406 million in TYL's case. Pioneer Natural Resources Company (NYSE:PXD) is the most popular stock in this table. On the other hand Ryanair Holdings plc (NASDAQ:RYAAY) is the least popular one with only 22 bullish hedge fund positions. Tyler Technologies, Inc. (NYSE:TYL) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately TYL wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TYL were disappointed as the stock returned 17% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.
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