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Were Hedge Funds Right About Cornerstone OnDemand, Inc. (CSOD)?

Debasis Saha
·6 mins read

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cornerstone OnDemand, Inc. (NASDAQ:CSOD) and determine whether hedge funds had an edge regarding this stock.

Is Cornerstone OnDemand, Inc. (NASDAQ:CSOD) a safe investment right now? The best stock pickers were becoming less hopeful. The number of bullish hedge fund bets decreased by 5 lately. Our calculations also showed that CSOD isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

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 S&P 500 ETFs by more than 58 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Clifton Robbins Blue Harbour
Clifton Robbins Blue Harbour

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now let's analyze the key hedge fund action surrounding Cornerstone OnDemand, Inc. (NASDAQ:CSOD).

How are hedge funds trading Cornerstone OnDemand, Inc. (NASDAQ:CSOD)?

At the end of the first quarter, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CSOD over the last 18 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CSOD A Good Stock To Buy?
Is CSOD A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Rivulet Capital, managed by Barry Lebovits and Joshua Kuntz, holds the largest position in Cornerstone OnDemand, Inc. (NASDAQ:CSOD). Rivulet Capital has a $124.6 million position in the stock, comprising 8% of its 13F portfolio. The second largest stake is held by Eminence Capital, led by Ricky Sandler, holding a $79.8 million position; the fund has 0.9% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish contain Kevin Oram and Peter Uddo's Praesidium Investment Management Company, Robert G. Moses's RGM Capital and Derek C. Schrier's Indaba Capital Management. In terms of the portfolio weights assigned to each position Indaba Capital Management allocated the biggest weight to Cornerstone OnDemand, Inc. (NASDAQ:CSOD), around 17.93% of its 13F portfolio. Rivulet Capital is also relatively very bullish on the stock, setting aside 7.98 percent of its 13F equity portfolio to CSOD.

Since Cornerstone OnDemand, Inc. (NASDAQ:CSOD) has experienced a decline in interest from the smart money, logic holds that there was a specific group of fund managers who sold off their positions entirely by the end of the first quarter. Intriguingly, Robert Joseph Caruso's Select Equity Group said goodbye to the largest stake of the "upper crust" of funds watched by Insider Monkey, valued at about $24.9 million in stock. Clifton S. Robbins's fund, Blue Harbour Group, also cut its stock, about $12.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds by the end of the first quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Cornerstone OnDemand, Inc. (NASDAQ:CSOD) but similarly valued. These stocks are Sunstone Hotel Investors Inc (NYSE:SHO), Columbia Banking System Inc (NASDAQ:COLB), Endava plc (NYSE:DAVA), and Sanmina Corporation (NASDAQ:SANM). All of these stocks' market caps match CSOD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SHO,19,110027,-3 COLB,12,81200,2 DAVA,9,54064,2 SANM,15,146797,-6 Average,13.75,98022,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $98 million. That figure was $505 million in CSOD's case. Sunstone Hotel Investors Inc (NYSE:SHO) is the most popular stock in this table. On the other hand Endava plc (NYSE:DAVA) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Cornerstone OnDemand, Inc. (NASDAQ:CSOD) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on CSOD, though not to the same extent, as the stock returned 21.4% in Q2 and outperformed the market as well.

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

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