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Is Paychex, Inc. (PAYX) Going to Burn These Hedge Funds?

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Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 900 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Paychex, Inc. (NASDAQ:PAYX).

Paychex, Inc. (NASDAQ:PAYX) has experienced an increase in support from the world's most elite money managers of late. Paychex, Inc. (NASDAQ:PAYX) was in 29 hedge funds' portfolios at the end of June. The all time high for this statistic is 41. There were 25 hedge funds in our database with PAYX positions at the end of the first quarter. Our calculations also showed that PAYX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 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.

AQR CAPITAL MANAGEMENT
AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we're going to take a peek at the fresh hedge fund action regarding Paychex, Inc. (NASDAQ:PAYX).

Do Hedge Funds Think PAYX Is A Good Stock To Buy Now?

At Q2's end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PAYX over the last 24 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Select Equity Group held the most valuable stake in Paychex, Inc. (NASDAQ:PAYX), which was worth $610.8 million at the end of the second quarter. On the second spot was Echo Street Capital Management which amassed $109 million worth of shares. Arrowstreet Capital, AQR Capital Management, and Adage Capital Management 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 Select Equity Group allocated the biggest weight to Paychex, Inc. (NASDAQ:PAYX), around 2.09% of its 13F portfolio. Hourglass Capital is also relatively very bullish on the stock, designating 1.28 percent of its 13F equity portfolio to PAYX.

Now, key hedge funds have jumped into Paychex, Inc. (NASDAQ:PAYX) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most outsized position in Paychex, Inc. (NASDAQ:PAYX). Arrowstreet Capital had $67.1 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace LLP also made a $2.3 million investment in the stock during the quarter. The other funds with new positions in the stock are Brad Dunkley and Blair Levinsky's Waratah Capital Advisors, Matthew Tewksbury's Stevens Capital Management, and Karim Abbadi and Edward McBride's Centiva Capital.

Let's now take a look at hedge fund activity in other stocks similar to Paychex, Inc. (NASDAQ:PAYX). These stocks are Rocket Companies, Inc. (NYSE:RKT), Manulife Financial Corporation (NYSE:MFC), Cadence Design Systems Inc (NASDAQ:CDNS), The Travelers Companies Inc (NYSE:TRV), Phillips 66 (NYSE:PSX), Okta, Inc. (NASDAQ:OKTA), and International Flavors & Fragrances Inc (NYSE:IFF). This group of stocks' market values match PAYX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RKT,13,115980,-8 MFC,18,307415,1 CDNS,33,1623503,3 TRV,34,579032,-1 PSX,26,295579,2 OKTA,57,2090544,9 IFF,52,3289883,-3 Average,33.3,1185991,0.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $1186 million. That figure was $940 million in PAYX's case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand Rocket Companies, Inc. (NYSE:RKT) is the least popular one with only 13 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 overall hedge fund sentiment score for PAYX is 48.4. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. A small number of hedge funds were also right about betting on PAYX as the stock returned 11.7% since the end of the second quarter (through 10/15) and outperformed the market by an even larger margin.

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