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Were Hedge Funds Right About Crowding Into Zendesk Inc (ZEN)?

·6 min read

In this article you are going to find out whether hedge funds think Zendesk Inc (NYSE:ZEN) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Zendesk Inc (NYSE:ZEN) has seen an increase in enthusiasm from smart money of late. Zendesk Inc (NYSE:ZEN) was in 63 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 61. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 55 hedge funds in our database with ZEN positions at the end of the first quarter. Our calculations also showed that ZEN 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 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 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.

Eashwar Krishnan - Tybourne Capital
Eashwar Krishnan - Tybourne Capital

Eashwar Krishnan of Tybourne Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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 we're going to review the recent hedge fund action surrounding Zendesk Inc (NYSE:ZEN).

Hedge fund activity in Zendesk Inc (NYSE:ZEN)

At Q2's end, a total of 63 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in ZEN over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Whale Rock Capital Management held the most valuable stake in Zendesk Inc (NYSE:ZEN), which was worth $262.7 million at the end of the third quarter. On the second spot was Cadian Capital which amassed $242.4 million worth of shares. Echo Street Capital Management, Polar Capital, and SQN Investors 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 North Peak Capital allocated the biggest weight to Zendesk Inc (NYSE:ZEN), around 15.97% of its 13F portfolio. Toronado Partners is also relatively very bullish on the stock, earmarking 11.95 percent of its 13F equity portfolio to ZEN.

As industrywide interest jumped, specific money managers were breaking ground themselves. North Peak Capital, managed by Michael Kahan and Jeremy Kahan, created the largest position in Zendesk Inc (NYSE:ZEN). North Peak Capital had $72.5 million invested in the company at the end of the quarter. Eashwar Krishnan's Tybourne Capital Management also made a $71 million investment in the stock during the quarter. The following funds were also among the new ZEN investors: Alok Agrawal's Bloom Tree Partners, Baker Burleson and Stormy Scott's Banbury Partners, and Peter Muller's PDT Partners.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Zendesk Inc (NYSE:ZEN) but similarly valued. We will take a look at Bio-Techne Corporation (NASDAQ:TECH), United Airlines Holdings Inc (NASDAQ:UAL), Erie Indemnity Company (NASDAQ:ERIE), Medical Properties Trust, Inc. (NYSE:MPW), Advance Auto Parts, Inc. (NYSE:AAP), NetApp Inc. (NASDAQ:NTAP), and Darden Restaurants, Inc. (NYSE:DRI). All of these stocks' market caps are similar to ZEN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TECH,27,278924,1 UAL,38,917094,-3 ERIE,14,42805,-3 MPW,17,162185,1 AAP,47,1507053,9 NTAP,25,465896,-1 DRI,49,1202504,-3 Average,31,653780,0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $654 million. That figure was $1579 million in ZEN's case. Darden Restaurants, Inc. (NYSE:DRI) is the most popular stock in this table. On the other hand Erie Indemnity Company (NASDAQ:ERIE) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Zendesk Inc (NYSE:ZEN) is more popular among hedge funds. Our overall hedge fund sentiment score for ZEN is 90. 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 returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on ZEN as the stock returned 26.8% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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