We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Cognizant Technology Solutions Corp (NASDAQ:CTSH) and determine whether hedge funds skillfully traded this stock.
Is Cognizant Technology Solutions Corp (NASDAQ:CTSH) a buy, sell, or hold? Prominent investors were taking a bullish view. The number of bullish hedge fund bets improved by 1 lately. Cognizant Technology Solutions Corp (NASDAQ:CTSH) was in 39 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 55. Our calculations also showed that CTSH isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 38 hedge funds in our database with CTSH positions at the end of the first quarter. 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 58 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.
Richard S. Pzena of Pzena Investment Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. Now we're going to review the new hedge fund action surrounding Cognizant Technology Solutions Corp (NASDAQ:CTSH).
Hedge fund activity in Cognizant Technology Solutions Corp (NASDAQ:CTSH)
At second quarter's end, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CTSH over the last 20 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Generation Investment Management, managed by David Blood and Al Gore, holds the biggest position in Cognizant Technology Solutions Corp (NASDAQ:CTSH). Generation Investment Management has a $914.2 million position in the stock, comprising 5.3% of its 13F portfolio. Coming in second is Pzena Investment Management, managed by Richard S. Pzena, which holds a $498 million position; 3.2% of its 13F portfolio is allocated to the stock. Other professional money managers that hold long positions encompass Donald Yacktman's Yacktman Asset Management, Ric Dillon's Diamond Hill Capital and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Broad Peak Investment Holdings allocated the biggest weight to Cognizant Technology Solutions Corp (NASDAQ:CTSH), around 7% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, earmarking 5.27 percent of its 13F equity portfolio to CTSH.
Now, some big names were leading the bulls' herd. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the most outsized position in Cognizant Technology Solutions Corp (NASDAQ:CTSH). Balyasny Asset Management had $10.6 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital also made a $8 million investment in the stock during the quarter. The other funds with brand new CTSH positions are Seth Cogswell's Running Oak Capital, Ken Grossman and Glen Schneider's SG Capital Management, and D. E. Shaw's D E Shaw.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Cognizant Technology Solutions Corp (NASDAQ:CTSH) but similarly valued. These stocks are Chunghwa Telecom Co., Ltd (NYSE:CHT), The Allstate Corporation (NYSE:ALL), Match Group, Inc. (NASDAQ:MTCH), Ross Stores, Inc. (NASDAQ:ROST), Dow Inc. (NYSE:DOW), KLA Corporation (NASDAQ:KLAC), and ICICI Bank Limited (NYSE:IBN). This group of stocks' market valuations are closest to CTSH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHT,4,157957,-2 ALL,46,1451840,3 MTCH,39,1755544,1 ROST,50,767478,1 DOW,35,452224,-3 KLAC,37,661971,11 IBN,20,231584,-4 Average,33,782657,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $783 million. That figure was $2594 million in CTSH's case. Ross Stores, Inc. (NASDAQ:ROST) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 4 bullish hedge fund positions. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CTSH is 65.3. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on CTSH, though not to the same extent, as the stock returned 18.1% since the end of June and outperformed the market as well.
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Disclosure: None. This article was originally published at Insider Monkey.