Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 8 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Paychex, Inc. (NASDAQ:PAYX).
Paychex, Inc. (NASDAQ:PAYX) has experienced a decrease in activity from the world's largest hedge funds recently. PAYX was in 21 hedge funds' portfolios at the end of the first quarter of 2019. There were 30 hedge funds in our database with PAYX positions at the end of the previous quarter. Our calculations also showed that PAYX isn't among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
[caption id="attachment_745225" align="aligncenter" width="473"] Noam Gottesman, GLG Partners[/caption]
Let's take a glance at the recent hedge fund action regarding Paychex, Inc. (NASDAQ:PAYX).
What does the smart money think about Paychex, Inc. (NASDAQ:PAYX)?
At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from the fourth quarter of 2018. By comparison, 22 hedge funds held shares or bullish call options in PAYX a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Select Equity Group was the largest shareholder of Paychex, Inc. (NASDAQ:PAYX), with a stake worth $406.1 million reported as of the end of March. Trailing Select Equity Group was Arrowstreet Capital, which amassed a stake valued at $217 million. AQR Capital Management, GLG Partners, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that Paychex, Inc. (NASDAQ:PAYX) has faced falling interest from hedge fund managers, we can see that there exists a select few money managers who sold off their entire stakes last quarter. At the top of the heap, Jim Simons's Renaissance Technologies dumped the biggest investment of the "upper crust" of funds followed by Insider Monkey, worth close to $37.7 million in stock. Clint Carlson's fund, Carlson Capital, also cut its stock, about $16.4 million worth. These moves are important to note, as total hedge fund interest fell by 9 funds last quarter.
Let's go over hedge fund activity in other stocks similar to Paychex, Inc. (NASDAQ:PAYX). We will take a look at ONEOK, Inc. (NYSE:OKE), Baker Hughes, a GE company (NYSE:BHGE), Southwest Airlines Co. (NYSE:LUV), and Pinduoduo Inc. (NASDAQ:PDD). This group of stocks' market caps are closest to PAYX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OKE,14,278924,-12 BHGE,23,415986,-5 LUV,35,3383550,-5 PDD,32,496446,12 Average,26,1143727,-2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $1144 million. That figure was $808 million in PAYX's case. Southwest Airlines Co. (NYSE:LUV) is the most popular stock in this table. On the other hand ONEOK, Inc. (NYSE:OKE) is the least popular one with only 14 bullish hedge fund positions. Paychex, Inc. (NASDAQ:PAYX) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. A small number of hedge funds were also right about betting on PAYX as the stock returned 8.3% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.