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Hedge Funds Souring On Healthequity Inc (HQY)

Asma UL Husna

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Healthequity Inc (NASDAQ:HQY).

Is Healthequity Inc (NASDAQ:HQY) a buy right now? Money managers are in a pessimistic mood. The number of long hedge fund bets fell by 4 recently. Our calculations also showed that HQY isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

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.

[caption id="attachment_315176" align="aligncenter" width="392"] Michael Castor of Sio Capital[/caption]

Michael Castor of Sio Capital

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let's take a glance at the fresh hedge fund action encompassing Healthequity Inc (NASDAQ:HQY).

How are hedge funds trading Healthequity Inc (NASDAQ:HQY)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HQY over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Echo Street Capital Management, managed by Greg Poole, holds the biggest position in Healthequity Inc (NASDAQ:HQY). Echo Street Capital Management has a $44.4 million position in the stock, comprising 1% of its 13F portfolio. Coming in second is Rock Springs Capital Management, led by Kris Jenner, Gordon Bussard, Graham McPhail, holding a $15.4 million position; the fund has 0.6% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish consist of Ken Griffin's Citadel Investment Group, Israel Englander's Millennium Management and Matthew Hulsizer's PEAK6 Capital Management. In terms of the portfolio weights assigned to each position Echo Street Capital Management allocated the biggest weight to Healthequity Inc (NASDAQ:HQY), around 0.95% of its 13F portfolio. Rock Springs Capital Management is also relatively very bullish on the stock, dishing out 0.64 percent of its 13F equity portfolio to HQY.

Due to the fact that Healthequity Inc (NASDAQ:HQY) has experienced a decline in interest from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of fund managers who were dropping their entire stakes by the end of the first quarter. Interestingly, Alexander Charles McAree's Red Cedar Management cut the largest position of the "upper crust" of funds tracked by Insider Monkey, comprising close to $8.9 million in stock, and Renaissance Technologies was right behind this move, as the fund said goodbye to about $6.7 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 4 funds by the end of the first quarter.

Let's check out hedge fund activity in other stocks similar to Healthequity Inc (NASDAQ:HQY). We will take a look at BridgeBio Pharma, Inc. (NASDAQ:BBIO), eHealth, Inc. (NASDAQ:EHTH), Tapestry, Inc. (NYSE:TPR), and AGCO Corporation (NYSE:AGCO). All of these stocks' market caps are similar to HQY's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BBIO,12,1212843,1 EHTH,35,411257,9 TPR,37,351229,-3 AGCO,19,125602,-9 Average,25.75,525233,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $525 million. That figure was $96 million in HQY's case. Tapestry, Inc. (NYSE:TPR) is the most popular stock in this table. On the other hand BridgeBio Pharma, Inc. (NASDAQ:BBIO) is the least popular one with only 12 bullish hedge fund positions. Healthequity Inc (NASDAQ:HQY) is not the least popular stock in this group but hedge fund interest is still below average. 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 13.4% in 2020 through June 22nd and surpassed the market by 15.9 percentage points. Unfortunately HQY wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HQY investors were disappointed as the stock returned 19.6% during the second quarter 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.

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

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