Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Paycom Software Inc (NYSE:PAYC) changed recently.
Paycom Software Inc (NYSE:PAYC) was in 31 hedge funds' portfolios at the end of September. PAYC has experienced an increase in hedge fund sentiment lately. There were 24 hedge funds in our database with PAYC holdings at the end of the previous quarter. Our calculations also showed that PAYC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 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 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_758442" align="aligncenter" width="450"] Michael Platt of BlueCrest Capital Mgmt.[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind let's take a glance at the fresh hedge fund action regarding Paycom Software Inc (NYSE:PAYC).
Hedge fund activity in Paycom Software Inc (NYSE:PAYC)
At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 29% from the second quarter of 2019. On the other hand, there were a total of 23 hedge funds with a bullish position in PAYC a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Paycom Software Inc (NYSE:PAYC) was held by Citadel Investment Group, which reported holding $73.7 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $59 million position. Other investors bullish on the company included Arrowstreet Capital, Fisher Asset Management, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Navellier & Associates allocated the biggest weight to Paycom Software Inc (NYSE:PAYC), around 2.32% of its 13F portfolio. Mondrian Capital is also relatively very bullish on the stock, earmarking 1.97 percent of its 13F equity portfolio to PAYC.
Consequently, some big names were breaking ground themselves. Moore Global Investments, managed by Louis Bacon, established the biggest position in Paycom Software Inc (NYSE:PAYC). Moore Global Investments had $7.3 million invested in the company at the end of the quarter. John Brandmeyer's Cognios Capital also made a $1.8 million investment in the stock during the quarter. The following funds were also among the new PAYC investors: Benjamin A. Smith's Laurion Capital Management, Matthew Tewksbury's Stevens Capital Management, and Michael Platt and William Reeves's BlueCrest Capital Mgmt..
Let's also examine hedge fund activity in other stocks similar to Paycom Software Inc (NYSE:PAYC). These stocks are Liberty Global Plc (NASDAQ:LBTYK), Fidelity National Financial Inc (NYSE:FNF), Equity Lifestyle Properties, Inc. (NYSE:ELS), and Vornado Realty Trust (NYSE:VNO). This group of stocks' market valuations are similar to PAYC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LBTYK,38,3404866,4 FNF,28,340609,-1 ELS,19,521910,1 VNO,32,724917,5 Average,29.25,1248076,2.25 [/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 $1248 million. That figure was $414 million in PAYC's case. Liberty Global Plc (NASDAQ:LBTYK) is the most popular stock in this table. On the other hand Equity Lifestyle Properties, Inc. (NYSE:ELS) is the least popular one with only 19 bullish hedge fund positions. Paycom Software Inc (NYSE:PAYC) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on PAYC as the stock returned 116.4% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.