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Were Hedge Funds Right About Cognizant Technology Solutions Corp (CTSH)?

Asma UL Husna
·6 min read

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Cognizant Technology Solutions Corp (NASDAQ:CTSH).

Cognizant Technology Solutions Corp (NASDAQ:CTSH) has seen an increase in support from the world's most elite money managers recently. Cognizant Technology Solutions Corp (NASDAQ:CTSH) was in 39 hedge funds' portfolios at the end of June. The all time high for this statistics is 55. There were 38 hedge funds in our database with CTSH holdings at the end of March. Our calculations also showed that CTSH isn't among the 30 most popular stocks among hedge funds (click for Q2 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Blood
David Blood

David Blood of Generation Investment 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 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now let's take a gander at the latest hedge fund action encompassing Cognizant Technology Solutions Corp (NASDAQ:CTSH).

Hedge fund activity in Cognizant Technology Solutions Corp (NASDAQ:CTSH)

At the end of June, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CTSH over the last 20 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Is CTSH A Good Stock To Buy?
Is CTSH A Good Stock To Buy?

The largest stake in Cognizant Technology Solutions Corp (NASDAQ:CTSH) was held by Generation Investment Management, which reported holding $914.2 million worth of stock at the end of June. It was followed by Pzena Investment Management with a $498 million position. Other investors bullish on the company included Yacktman Asset Management, Diamond Hill Capital, and AQR Capital Management. In terms of the portfolio weights assigned to each position Broad Peak Investment Holdings allocated the biggest weight to Cognizant Technology Solutions Corp (NASDAQ:CTSH), around 7% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, setting aside 5.27 percent of its 13F equity portfolio to CTSH.

Now, some big names have been driving this bullishness. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the biggest position in Cognizant Technology Solutions Corp (NASDAQ:CTSH). Balyasny Asset Management had $10.6 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital also initiated a $8 million position during the quarter. The other funds with new positions in the stock are Seth Cogswell's Running Oak Capital, Ken Grossman and Glen Schneider's SG Capital Management, and D. E. Shaw's D E Shaw.

Let's now review hedge fund activity in other stocks similar to Cognizant Technology Solutions Corp (NASDAQ:CTSH). These stocks are Chunghwa Telecom Co., Ltd (NYSE:CHT), The Allstate Corporation (NYSE:ALL), Match Group, Inc. (NASDAQ:MTCH), Ross Stores, Inc. (NASDAQ:ROST), Dow Inc. (NYSE:DOW), KLA Corporation (NASDAQ:KLAC), and ICICI Bank Limited (NYSE:IBN). This group of stocks' market values resemble CTSH's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHT,4,157957,-2 ALL,46,1451840,3 MTCH,39,1755544,1 ROST,50,767478,1 DOW,35,452224,-3 KLAC,37,661971,11 IBN,20,231584,-4 Average,33,782657,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $783 million. That figure was $2594 million in CTSH's case. Ross Stores, Inc. (NASDAQ:ROST) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 4 bullish hedge fund positions. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CTSH is 65.3. 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 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on CTSH as the stock returned 26.1% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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