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 Jack Henry & Associates, Inc. (NASDAQ:JKHY) and determine whether hedge funds skillfully traded this stock.
Jack Henry & Associates, Inc. (NASDAQ:JKHY) was in 31 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 29. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. JKHY has seen an increase in enthusiasm from smart money recently. There were 27 hedge funds in our database with JKHY holdings at the end of March. Our calculations also showed that JKHY 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Joel Greenblatt of Gotham Asset Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. 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 analyze the fresh hedge fund action regarding Jack Henry & Associates, Inc. (NASDAQ:JKHY).
Hedge fund activity in Jack Henry & Associates, Inc. (NASDAQ:JKHY)
At the end of the second quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 15% from the first quarter of 2020. By comparison, 18 hedge funds held shares or bullish call options in JKHY a year ago. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
The largest stake in Jack Henry & Associates, Inc. (NASDAQ:JKHY) was held by Echo Street Capital Management, which reported holding $61.8 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $58.3 million position. Other investors bullish on the company included AQR Capital Management, GLG Partners, and Royce & Associates. In terms of the portfolio weights assigned to each position Bishop Rock Capital allocated the biggest weight to Jack Henry & Associates, Inc. (NASDAQ:JKHY), around 5.65% of its 13F portfolio. Echo Street Capital Management is also relatively very bullish on the stock, designating 0.73 percent of its 13F equity portfolio to JKHY.
With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls' herd. Gotham Asset Management, managed by Joel Greenblatt, created the biggest position in Jack Henry & Associates, Inc. (NASDAQ:JKHY). Gotham Asset Management had $2.7 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also initiated a $1.9 million position during the quarter. The other funds with brand new JKHY positions are Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, Parvinder Thiara's Athanor Capital, and Jonathan Soros's JS Capital.
Let's check out hedge fund activity in other stocks similar to Jack Henry & Associates, Inc. (NASDAQ:JKHY). These stocks are Roku, Inc. (NASDAQ:ROKU), Boston Properties, Inc. (NYSE:BXP), EPAM Systems Inc (NYSE:EPAM), Teradyne, Inc. (NASDAQ:TER), Dover Corporation (NYSE:DOV), Rollins, Inc. (NYSE:ROL), and International Paper Company (NYSE:IP). This group of stocks' market valuations are similar to JKHY's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ROKU,41,450808,6 BXP,36,539228,7 EPAM,28,482887,1 TER,34,1354430,6 DOV,40,683970,9 ROL,29,577262,4 IP,29,238219,0 Average,33.9,618115,4.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.9 hedge funds with bullish positions and the average amount invested in these stocks was $618 million. That figure was $276 million in JKHY's case. Roku, Inc. (NASDAQ:ROKU) is the most popular stock in this table. On the other hand EPAM Systems Inc (NYSE:EPAM) is the least popular one with only 28 bullish hedge fund positions. Jack Henry & Associates, Inc. (NASDAQ:JKHY) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for JKHY is 50.5. 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 negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 23.8% in 2020 through September 14th and surpassed the market by 17.6 percentage points. Unfortunately JKHY wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); JKHY investors were disappointed as the stock returned -13.7% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Get real-time email alerts: Follow Henry Jack & Associates Inc (NASDAQ:JKHY)
Disclosure: None. This article was originally published at Insider Monkey.