How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding DocuSign, Inc. (NASDAQ:DOCU) and determine whether hedge funds had an edge regarding this stock.
DocuSign, Inc. (NASDAQ:DOCU) was in 57 hedge funds' portfolios at the end of June. The all time high for this statistics is 47. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. DOCU has experienced an increase in enthusiasm from smart money recently. There were 47 hedge funds in our database with DOCU holdings at the end of March. Our calculations also showed that DOCU 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). Video: Watch our video about the top 5 most popular hedge fund stocks.
In the eyes of most stock holders, hedge funds are perceived as underperforming, old financial vehicles of yesteryear. While there are over 8000 funds with their doors open today, Our experts hone in on the top tier of this club, around 850 funds. These money managers administer most of the smart money's total asset base, and by shadowing their inimitable picks, Insider Monkey has identified a few investment strategies that have historically defeated Mr. Market. Insider Monkey's flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .
Israel Englander of Millennium Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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.. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let's analyze the fresh hedge fund action surrounding DocuSign, Inc. (NASDAQ:DOCU).
How are hedge funds trading DocuSign, Inc. (NASDAQ:DOCU)?
At the end of the second quarter, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in DOCU a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The largest stake in DocuSign, Inc. (NASDAQ:DOCU) was held by Whale Rock Capital Management, which reported holding $541.6 million worth of stock at the end of September. It was followed by D E Shaw with a $374 million position. Other investors bullish on the company included Select Equity Group, Matrix Capital Management, and Melvin Capital Management. In terms of the portfolio weights assigned to each position Cota Capital allocated the biggest weight to DocuSign, Inc. (NASDAQ:DOCU), around 11.4% of its 13F portfolio. Cowbird Capital is also relatively very bullish on the stock, earmarking 6.87 percent of its 13F equity portfolio to DOCU.
Now, key money managers have been driving this bullishness. Select Equity Group, managed by Robert Joseph Caruso, established the biggest position in DocuSign, Inc. (NASDAQ:DOCU). Select Equity Group had $282.5 million invested in the company at the end of the quarter. Gabriel Plotkin's Melvin Capital Management also made a $214.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Philippe Laffont's Coatue Management, Christopher Lyle's SCGE Management, and Israel Englander's Millennium Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as DocuSign, Inc. (NASDAQ:DOCU) but similarly valued. These stocks are Splunk Inc (NASDAQ:SPLK), Orange SA (NYSE:ORAN), Phillips 66 (NYSE:PSX), Mizuho Financial Group Inc. (NYSE:MFG), O'Reilly Automotive Inc (NASDAQ:ORLY), Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), and Southern Copper Corporation (NYSE:SCCO). This group of stocks' market caps are similar to DOCU's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPLK,49,874330,12 ORAN,3,6480,-2 PSX,42,362906,-1 MFG,8,17393,2 ORLY,61,2930519,1 ERIC,23,400790,3 SCCO,19,222306,0 Average,29.3,687818,2.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.3 hedge funds with bullish positions and the average amount invested in these stocks was $688 million. That figure was $2586 million in DOCU's case. O'Reilly Automotive Inc (NASDAQ:ORLY) is the most popular stock in this table. On the other hand Orange SA (NYSE:ORAN) is the least popular one with only 3 bullish hedge fund positions. DocuSign, Inc. (NASDAQ:DOCU) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DOCU is 86.6. 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 28.2% in 2020 through August 24th but still beat the market by 20.6 percentage points. Hedge funds were also right about betting on DOCU as the stock returned 18.7% since Q2 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.