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Did Hedge Funds Drop The Ball On Varonis Systems Inc (VRNS) ?

Abigail Fisher

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% 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 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Varonis Systems Inc (NASDAQ:VRNS) has experienced a decrease in activity from the world's largest hedge funds of late. VRNS was in 23 hedge funds' portfolios at the end of September. There were 24 hedge funds in our database with VRNS positions at the end of the previous quarter. Our calculations also showed that VRNS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_674067" align="aligncenter" width="473"] Gil Simon of SoMa Equity Partners[/caption]

Gil Simon of SoMa Equity Partners

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 view the new hedge fund action encompassing Varonis Systems Inc (NASDAQ:VRNS).

How have hedgies been trading Varonis Systems Inc (NASDAQ:VRNS)?

At the end of the third quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in VRNS a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

More specifically, Cadian Capital was the largest shareholder of Varonis Systems Inc (NASDAQ:VRNS), with a stake worth $113.3 million reported as of the end of September. Trailing Cadian Capital was SoMa Equity Partners, which amassed a stake valued at $65.8 million. Atalan Capital, Tremblant Capital, and Point72 Asset Management 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 North Run Capital allocated the biggest weight to Varonis Systems Inc (NASDAQ:VRNS), around 8.87% of its 13F portfolio. Cadian Capital is also relatively very bullish on the stock, designating 5.39 percent of its 13F equity portfolio to VRNS.

Seeing as Varonis Systems Inc (NASDAQ:VRNS) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of funds who were dropping their positions entirely by the end of the third quarter. At the top of the heap, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali's Alta Park Capital sold off the largest stake of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $7.4 million in stock, and Renaissance Technologies was right behind this move, as the fund dropped about $4.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 1 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to Varonis Systems Inc (NASDAQ:VRNS). These stocks are BrightView Holdings, Inc. (NYSE:BV), Healthcare Services Group, Inc. (NASDAQ:HCSG), Freshpet Inc (NASDAQ:FRPT), and Forward Air Corporation (NASDAQ:FWRD). All of these stocks' market caps are closest to VRNS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BV,10,284642,2 HCSG,16,85990,-4 FRPT,18,126120,-6 FWRD,20,133372,2 Average,16,157531,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $158 million. That figure was $409 million in VRNS's case. Forward Air Corporation (NASDAQ:FWRD) is the most popular stock in this table. On the other hand BrightView Holdings, Inc. (NYSE:BV) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Varonis Systems Inc (NASDAQ:VRNS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on VRNS as the stock returned 30.7% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Disclosure: None. This article was originally published at Insider Monkey.

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