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Is HMS Holdings Corp. (HMSY) Going To Burn These Hedge Funds ?

Nina Todic

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like HMS Holdings Corp. (NASDAQ:HMSY).

HMS Holdings Corp. (NASDAQ:HMSY) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds' portfolios at the end of September. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Energizer Holdings, Inc. (NYSE:ENR), KB Home (NYSE:KBH), and Valmont Industries, Inc. (NYSE:VMI) to gather more data points. Our calculations also showed that HMSY isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_746893" align="aligncenter" width="473"] Paul Marshall of Marshall Wace[/caption]

Paul Marshall Marshall Wace

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a look at the latest hedge fund action encompassing HMS Holdings Corp. (NASDAQ:HMSY).

What does smart money think about HMS Holdings Corp. (NASDAQ:HMSY)?

Heading into the fourth quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in HMSY over the last 17 quarters. With the smart money's capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Among these funds, Citadel Investment Group held the most valuable stake in HMS Holdings Corp. (NASDAQ:HMSY), which was worth $24.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $18.5 million worth of shares. Marshall Wace, GLG Partners, and D E Shaw 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 Tamarack Capital Management allocated the biggest weight to HMS Holdings Corp. (NASDAQ:HMSY), around 2.02% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, earmarking 0.74 percent of its 13F equity portfolio to HMSY.

Since HMS Holdings Corp. (NASDAQ:HMSY) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of fund managers that decided to sell off their positions entirely by the end of the third quarter. At the top of the heap, Steve Cohen's Point72 Asset Management cut the largest investment of the 750 funds watched by Insider Monkey, comprising about $10.8 million in call options. Ken Griffin's fund, Citadel Investment Group, also dumped its call options, about $3.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as HMS Holdings Corp. (NASDAQ:HMSY) but similarly valued. We will take a look at Energizer Holdings, Inc. (NYSE:ENR), KB Home (NYSE:KBH), Valmont Industries, Inc. (NYSE:VMI), and BancorpSouth Bank (NYSE:BXS). This group of stocks' market values are closest to HMSY's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENR,17,214912,0 KBH,26,572848,9 VMI,25,288741,0 BXS,12,82186,0 Average,20,289672,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $290 million. That figure was $126 million in HMSY's case. KB Home (NYSE:KBH) is the most popular stock in this table. On the other hand BancorpSouth Bank (NYSE:BXS) is the least popular one with only 12 bullish hedge fund positions. HMS Holdings Corp. (NASDAQ:HMSY) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately HMSY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HMSY were disappointed as the stock returned -12.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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