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Hedge Funds Are Coming Back To Zendesk Inc (ZEN)

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  • ZEN

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Zendesk Inc (NYSE:ZEN) to find out whether there were any major changes in hedge funds' views.

Zendesk Inc (NYSE:ZEN) has seen an increase in support from the world's most elite money managers recently. Zendesk Inc (NYSE:ZEN) was in 52 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 63. There were 45 hedge funds in our database with ZEN holdings at the end of March. Our calculations also showed that ZEN isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 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.

Tim Woolley of Polar Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let's view the key hedge fund action surrounding Zendesk Inc (NYSE:ZEN).

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

At Q2's end, a total of 52 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from one quarter earlier. On the other hand, there were a total of 63 hedge funds with a bullish position in ZEN 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, 0 held the most valuable stake in Zendesk Inc (NYSE:ZEN), which was worth $292.9 million at the end of the second quarter. On the second spot was Cadian Capital which amassed $217.1 million worth of shares. Polar Capital, Point72 Asset Management, and Echo Street Capital 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 Cadian Capital allocated the biggest weight to Zendesk Inc (NYSE:ZEN), around 9.64% of its 13F portfolio. Toronado Partners is also relatively very bullish on the stock, earmarking 8.93 percent of its 13F equity portfolio to ZEN.

As one would reasonably expect, some big names were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, established the largest position in Zendesk Inc (NYSE:ZEN). Balyasny Asset Management had $87.2 million invested in the company at the end of the quarter. Anand Parekh's Alyeska Investment Group also initiated a $52.4 million position during the quarter. The other funds with new positions in the stock are Renaissance Technologies, Louis Bacon's Moore Global Investments, and Michel Massoud's Melqart Asset Management.

Let's check out hedge fund activity in other stocks similar to Zendesk Inc (NYSE:ZEN). We will take a look at Bill.com Holdings, Inc. (NYSE:BILL), CMS Energy Corporation (NYSE:CMS), Hologic, Inc. (NASDAQ:HOLX), Monolithic Power Systems, Inc. (NASDAQ:MPWR), Celanese Corporation (NYSE:CE), Diamondback Energy Inc (NASDAQ:FANG), and United Airlines Holdings Inc (NASDAQ:UAL). This group of stocks' market values are similar to ZEN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BILL,53,2766914,2 CMS,31,693813,3 HOLX,41,977376,9 MPWR,34,702043,2 CE,37,594932,1 FANG,38,443251,3 UAL,39,704030,1 Average,39,983194,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $983 million. That figure was $1852 million in ZEN's case. Bill.com Holdings, Inc. (NYSE:BILL) is the most popular stock in this table. On the other hand CMS Energy Corporation (NYSE:CMS) is the least popular one with only 31 bullish hedge fund positions. Zendesk Inc (NYSE:ZEN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ZEN is 82.5. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.9% in 2021 through October 1st and beat the market again by 5.6 percentage points. Unfortunately ZEN wasn't nearly as popular as these 5 stocks and hedge funds that were betting on ZEN were disappointed as the stock returned -19.2% since the end of June (through 10/1) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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