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Do Hedge Funds Love Change Healthcare Inc. (CHNG)?

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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 Change Healthcare Inc. (NASDAQ:CHNG) to find out whether there were any major changes in hedge funds' views.

Is Change Healthcare Inc. (NASDAQ:CHNG) a buy, sell, or hold? Hedge funds were selling. The number of long hedge fund bets were trimmed by 5 in recent months. Change Healthcare Inc. (NASDAQ:CHNG) was in 51 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 56. Our calculations also showed that CHNG isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 56 hedge funds in our database with CHNG holdings at the end of March.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 79 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Abrams
David Abrams

David Abrams of Abrams Capital Management

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. With all of this in mind we're going to view the new hedge fund action surrounding Change Healthcare Inc. (NASDAQ:CHNG).

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

At second quarter's end, a total of 51 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the previous quarter. By comparison, 47 hedge funds held shares or bullish call options in CHNG a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Abrams Capital Management held the most valuable stake in Change Healthcare Inc. (NASDAQ:CHNG), which was worth $321.3 million at the end of the second quarter. On the second spot was Pentwater Capital Management which amassed $207.5 million worth of shares. Magnetar Capital, Park West Asset Management, and Laurion 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 Abrams Capital Management allocated the biggest weight to Change Healthcare Inc. (NASDAQ:CHNG), around 7.14% of its 13F portfolio. Greenlight Capital is also relatively very bullish on the stock, earmarking 4.99 percent of its 13F equity portfolio to CHNG.

Judging by the fact that Change Healthcare Inc. (NASDAQ:CHNG) has faced falling interest from the smart money, it's safe to say that there was a specific group of hedge funds who sold off their entire stakes in the second quarter. It's worth mentioning that Amy Minella's Cardinal Capital dropped the biggest investment of the "upper crust" of funds watched by Insider Monkey, comprising an estimated $31.1 million in stock, and Paul Glazer's Glazer Capital was right behind this move, as the fund dropped about $6.8 million worth. These moves are interesting, as aggregate hedge fund interest fell by 5 funds in the second quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Change Healthcare Inc. (NASDAQ:CHNG) but similarly valued. We will take a look at Nikola Corporation (NASDAQ:NKLA), Toll Brothers Inc (NYSE:TOL), Cullen/Frost Bankers, Inc. (NYSE:CFR), Axalta Coating Systems Ltd (NYSE:AXTA), Digital Turbine Inc (NASDAQ:APPS), Ascendis Pharma A/S (NASDAQ:ASND), and Brooks Automation, Inc. (NASDAQ:BRKS). This group of stocks' market caps resemble CHNG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NKLA,12,389494,-7 TOL,32,800434,2 CFR,13,32297,2 AXTA,47,1489747,4 APPS,30,325569,8 ASND,29,2290305,1 BRKS,32,510367,7 Average,27.9,834030,2.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.9 hedge funds with bullish positions and the average amount invested in these stocks was $834 million. That figure was $1840 million in CHNG's case. Axalta Coating Systems Ltd (NYSE:AXTA) is the most popular stock in this table. On the other hand Nikola Corporation (NASDAQ:NKLA) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Change Healthcare Inc. (NASDAQ:CHNG) is more popular among hedge funds. Our overall hedge fund sentiment score for CHNG is 77.3. 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 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 still beat the market by 5.6 percentage points. Unfortunately CHNG wasn't nearly as popular as these 5 stocks and hedge funds that were betting on CHNG were disappointed as the stock returned -8.3% since the end of the second quarter (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 most of these stocks already outperformed the market since 2019.

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