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Is GWRE A Good Stock To Buy According To Hedge Funds?

Debasis Saha
·6 min read

With the third-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the fourth quarter. One of these stocks was Guidewire Software Inc (NYSE:GWRE).

Is GWRE a good stock to buy? Guidewire Software Inc (NYSE:GWRE) has seen an increase in hedge fund sentiment recently. Guidewire Software Inc (NYSE:GWRE) was in 34 hedge funds' portfolios at the end of September. The all time high for this statistic is 34. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that GWRE isn't among the 30 most popular stocks among hedge funds (click for Q3 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.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 66 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.

David Siegel of Two Sigma Advisors
David Siegel of Two Sigma Advisors

David Siegel of Two Sigma Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind let's take a look at the new hedge fund action encompassing Guidewire Software Inc (NYSE:GWRE).

Do Hedge Funds Think GWRE Is A Good Stock To Buy Now?

At Q3's end, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in GWRE over the last 21 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is GWRE A Good Stock To Buy?
Is GWRE A Good Stock To Buy?

More specifically, Stockbridge Partners was the largest shareholder of Guidewire Software Inc (NYSE:GWRE), with a stake worth $467.5 million reported as of the end of September. Trailing Stockbridge Partners was Darsana Capital Partners, which amassed a stake valued at $130.3 million. Route One Investment Company, Skye Global Management, and Triple Frond Partners 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 Stockbridge Partners allocated the biggest weight to Guidewire Software Inc (NYSE:GWRE), around 12.87% of its 13F portfolio. Darsana Capital Partners is also relatively very bullish on the stock, designating 6.63 percent of its 13F equity portfolio to GWRE.

Consequently, key money managers have been driving this bullishness. Two Sigma Advisors, managed by John Overdeck and David Siegel, assembled the most valuable position in Guidewire Software Inc (NYSE:GWRE). Two Sigma Advisors had $3 million invested in the company at the end of the quarter. Joel Greenblatt's Gotham Asset Management also made a $1.2 million investment in the stock during the quarter. The other funds with brand new GWRE positions are Greg Eisner's Engineers Gate Manager, Qing Li's Sciencast Management, and Jinghua Yan's TwinBeech Capital.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Guidewire Software Inc (NYSE:GWRE) but similarly valued. We will take a look at GCI Liberty, Inc. (NASDAQ:GLIBA), Camden Property Trust (NYSE:CPT), Centrais Eletricas Brasileiras SA (NYSE:EBR), CureVac N.V. (NASDAQ:CVAC), Algonquin Power & Utilities Corp. (NYSE:AQN), Vail Resorts, Inc. (NYSE:MTN), and Carlyle Group Inc (NASDAQ:CG). This group of stocks' market caps are similar to GWRE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GLIBA,48,2311934,-5 CPT,25,327898,-1 EBR,4,1572,-4 CVAC,9,54175,9 AQN,11,271429,-2 MTN,30,892415,-7 CG,14,190841,6 Average,20.1,578609,-0.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.1 hedge funds with bullish positions and the average amount invested in these stocks was $579 million. That figure was $1088 million in GWRE's case. GCI Liberty, Inc. (NASDAQ:GLIBA) is the most popular stock in this table. On the other hand Centrais Eletricas Brasileiras SA (NYSE:EBR) is the least popular one with only 4 bullish hedge fund positions. Guidewire Software Inc (NYSE:GWRE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GWRE is 74.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on GWRE as the stock returned 20.6% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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