Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost more than 25%. Facebook, which was the second most popular stock, lost 20% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the first 2.5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Varonis Systems Inc (NASDAQ:VRNS) going to take off soon? Money managers are selling. The number of bullish hedge fund positions retreated by 1 in recent months. Our calculations also showed that VRNS isn't among the 30 most popular stocks among hedge funds. VRNS was in 21 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 22 hedge funds in our database with VRNS holdings at the end of the previous quarter.
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 32 percentage points since May 2014 through March 12, 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_735677" align="aligncenter" width="473"] Sander Gerber of Hudson Bay Capital[/caption]
Let's take a glance at the latest hedge fund action regarding Varonis Systems Inc (NASDAQ:VRNS).
How have hedgies been trading Varonis Systems Inc (NASDAQ:VRNS)?
At Q4's end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards VRNS over the last 14 quarters. With the smart money's sentiment swirling, there exists a few key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Steve Cohen's Point72 Asset Management has the largest position in Varonis Systems Inc (NASDAQ:VRNS), worth close to $24.4 million, corresponding to 0.1% of its total 13F portfolio. Coming in second is Israel Englander of Millennium Management, with a $22.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish comprise John Overdeck and David Siegel's Two Sigma Advisors, Jim Simons's Renaissance Technologies and D. E. Shaw's D E Shaw.
Since Varonis Systems Inc (NASDAQ:VRNS) has faced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there was a specific group of hedge funds that slashed their full holdings heading into Q3. Interestingly, Guy Shahar's DSAM Partners sold off the biggest position of the "upper crust" of funds watched by Insider Monkey, valued at about $16.6 million in stock. John Horseman's fund, Horseman Capital Management, also sold off its stock, about $1.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 1 funds heading into Q3.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Varonis Systems Inc (NASDAQ:VRNS) but similarly valued. These stocks are Ensco Rowan plc (NYSE:ESV), Welbilt, Inc. (NYSE:WBT), LegacyTexas Financial Group Inc (NASDAQ:LTXB), and TopBuild Corp (NYSE:BLD). This group of stocks' market values are similar to VRNS's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ESV,34,291967,5 WBT,23,508373,1 LTXB,12,65493,-2 BLD,14,91036,-4 Average,20.75,239217,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $239 million. That figure was $138 million in VRNS's case. Ensco Rowan plc (NYSE:ESV) is the most popular stock in this table. On the other hand LegacyTexas Financial Group Inc (NASDAQ:LTXB) is the least popular one with only 12 bullish hedge fund positions. Varonis Systems Inc (NASDAQ:VRNS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately VRNS wasn't nearly as popular as these 15 stock and hedge funds that were betting on VRNS were disappointed as the stock returned 16.1% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.