Is Paylocity Holding Corp (NASDAQ:PCTY) a good bet right now? We like to analyze hedge fund sentiment before doing days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is Paylocity Holding Corp (NASDAQ:PCTY) an attractive investment right now? Prominent investors are selling. The number of bullish hedge fund positions went down by 8 recently. Our calculations also showed that pcty isn't among the 30 most popular stocks among hedge funds. PCTY was in 14 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 22 hedge funds in our database with PCTY holdings at the end of the previous quarter.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.
Let's view the key hedge fund action regarding Paylocity Holding Corp (NASDAQ:PCTY).
Hedge fund activity in Paylocity Holding Corp (NASDAQ:PCTY)
Heading into the first quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -36% from the previous quarter. By comparison, 18 hedge funds held shares or bullish call options in PCTY a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Echo Street Capital Management held the most valuable stake in Paylocity Holding Corp (NASDAQ:PCTY), which was worth $30.4 million at the end of the third quarter. On the second spot was D E Shaw which amassed $11.5 million worth of shares. Moreover, Renaissance Technologies, Marshall Wace LLP, and GLG Partners were also bullish on Paylocity Holding Corp (NASDAQ:PCTY), allocating a large percentage of their portfolios to this stock.
Since Paylocity Holding Corp (NASDAQ:PCTY) has faced falling interest from hedge fund managers, logic holds that there were a few funds who sold off their entire stakes in the third quarter. It's worth mentioning that Philip Hilal's Clearfield Capital sold off the largest position of all the hedgies followed by Insider Monkey, worth an estimated $14.5 million in stock. Richard Driehaus's fund, Driehaus Capital, also dropped its stock, about $4.8 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 8 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Paylocity Holding Corp (NASDAQ:PCTY) but similarly valued. We will take a look at FirstCash, Inc. (NASDAQ:FCFS), Black Stone Minerals LP (NYSE:BSM), Darling Ingredients Inc. (NYSE:DAR), and HUYA Inc. (NYSE:HUYA). This group of stocks' market values are similar to PCTY's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FCFS,12,130903,-4 BSM,5,10666,0 DAR,18,260731,-1 HUYA,16,150270,-1 Average,12.75,138143,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $138 million. That figure was $106 million in PCTY's case. Darling Ingredients Inc. (NYSE:DAR) is the most popular stock in this table. On the other hand Black Stone Minerals LP (NYSE:BSM) is the least popular one with only 5 bullish hedge fund positions. Paylocity Holding Corp (NASDAQ:PCTY) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on PCTY as the stock returned 51.4% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.