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 Nuance Communications Inc. (NASDAQ:NUAN) and determine whether hedge funds skillfully traded this stock.
Is Nuance Communications Inc. (NASDAQ:NUAN) going to take off soon? The smart money was becoming hopeful. The number of long hedge fund positions advanced by 2 recently. Nuance Communications Inc. (NASDAQ:NUAN) was in 44 hedge funds' portfolios at the end of June. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that NUAN 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 42 hedge funds in our database with NUAN positions at the end of the first quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Andreas Halvorsen of Viking Global
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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. 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 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 latest hedge fund action surrounding Nuance Communications Inc. (NASDAQ:NUAN).
Hedge fund activity in Nuance Communications Inc. (NASDAQ:NUAN)
At second quarter's end, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from one quarter earlier. By comparison, 28 hedge funds held shares or bullish call options in NUAN a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
More specifically, Viking Global was the largest shareholder of Nuance Communications Inc. (NASDAQ:NUAN), with a stake worth $323.9 million reported as of the end of September. Trailing Viking Global was Eminence Capital, which amassed a stake valued at $265.3 million. Southpoint Capital Advisors, RGM Capital, and Glenview Capital 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 Shelter Haven Capital Management allocated the biggest weight to Nuance Communications Inc. (NASDAQ:NUAN), around 11.72% of its 13F portfolio. RGM Capital is also relatively very bullish on the stock, setting aside 8.57 percent of its 13F equity portfolio to NUAN.
Now, key hedge funds were breaking ground themselves. Viking Global, managed by Andreas Halvorsen, initiated the most outsized position in Nuance Communications Inc. (NASDAQ:NUAN). Viking Global had $323.9 million invested in the company at the end of the quarter. Andrew Immerman and Jeremy Schiffman's Palestra Capital Management also initiated a $106.4 million position during the quarter. The other funds with new positions in the stock are Gabriel Plotkin's Melvin Capital Management, Scott Ferguson's Sachem Head Capital, and Leon Shaulov's Maplelane Capital.
Let's check out hedge fund activity in other stocks similar to Nuance Communications Inc. (NASDAQ:NUAN). These stocks are The Toro Company (NYSE:TTC), Lincoln National Corporation (NYSE:LNC), Bill.com Holdings, Inc. (NYSE:BILL), Knight-Swift Transportation Holdings Inc. (NYSE:KNX), Bright Horizons Family Solutions Inc (NYSE:BFAM), Huntington Ingalls Industries Inc (NYSE:HII), and Universal Display Corporation (NASDAQ:OLED). This group of stocks' market valuations are similar to NUAN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TTC,31,702703,7 LNC,34,493924,8 BILL,52,1196788,30 KNX,39,466487,7 BFAM,30,217350,3 HII,30,272167,9 OLED,25,216895,1 Average,34.4,509473,9.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 34.4 hedge funds with bullish positions and the average amount invested in these stocks was $509 million. That figure was $1828 million in NUAN's case. Bill.com Holdings, Inc. (NYSE:BILL) is the most popular stock in this table. On the other hand Universal Display Corporation (NASDAQ:OLED) is the least popular one with only 25 bullish hedge fund positions. Nuance Communications Inc. (NASDAQ:NUAN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NUAN is 72.2. 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 NUAN, though not to the same extent, as the stock returned 18.4% 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.