Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 24.4% compared to 20.4%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Is HMS Holdings Corp. (NASDAQ:HMSY) undervalued? The smart money is taking a pessimistic view. The number of long hedge fund bets decreased by 5 recently. Our calculations also showed that HMSY isn't among the 30 most popular stocks among hedge funds (view video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's go over the fresh hedge fund action encompassing HMS Holdings Corp. (NASDAQ:HMSY).
What have hedge funds been doing with HMS Holdings Corp. (NASDAQ:HMSY)?
At the end of the second quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in HMSY a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
More specifically, Citadel Investment Group was the largest shareholder of HMS Holdings Corp. (NASDAQ:HMSY), with a stake worth $43.9 million reported as of the end of March. Trailing Citadel Investment Group was D E Shaw, which amassed a stake valued at $25.8 million. AQR Capital Management, Marshall Wace LLP, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as HMS Holdings Corp. (NASDAQ:HMSY) has experienced a decline in interest from hedge fund managers, we can see that there was a specific group of funds that elected to cut their full holdings heading into Q3. At the top of the heap, Peter Muller's PDT Partners cut the biggest investment of all the hedgies tracked by Insider Monkey, totaling an estimated $2.2 million in stock, and Benjamin A. Smith's Laurion Capital Management was right behind this move, as the fund cut about $0.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 5 funds heading into Q3.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as HMS Holdings Corp. (NASDAQ:HMSY) but similarly valued. These stocks are Manchester United PLC (NYSE:MANU), Iovance Biotherapeutics, Inc. (NASDAQ:IOVA), Ryder System, Inc. (NYSE:R), and Hamilton Lane Incorporated (NASDAQ:HLNE). This group of stocks' market caps are similar to HMSY's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MANU,10,41706,-1 IOVA,22,1311346,-3 R,21,352543,2 HLNE,6,56143,-4 Average,14.75,440435,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $440 million. That figure was $186 million in HMSY's case. Iovance Biotherapeutics, Inc. (NASDAQ:IOVA) is the most popular stock in this table. On the other hand Hamilton Lane Incorporated (NASDAQ:HLNE) is the least popular one with only 6 bullish hedge fund positions. HMS Holdings Corp. (NASDAQ:HMSY) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on HMSY as the stock returned 6.4% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.