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Were Hedge Funds Right About Open Text Corporation (OTEX)?

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Is Open Text Corporation (NASDAQ:OTEX) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Open Text Corporation (NASDAQ:OTEX) was in 16 hedge funds' portfolios at the end of March. The all time high for this statistic is 22. OTEX has experienced a decrease in activity from the world's largest hedge funds in recent months. There were 18 hedge funds in our database with OTEX positions at the end of the fourth quarter. Our calculations also showed that OTEX isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Peter Rathjens Arrowstreet Capital 394
Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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. Keeping this in mind let's take a glance at the recent hedge fund action encompassing Open Text Corporation (NASDAQ:OTEX).

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

At the end of the first quarter, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the fourth quarter of 2020. On the other hand, there were a total of 18 hedge funds with a bullish position in OTEX a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

The largest stake in Open Text Corporation (NASDAQ:OTEX) was held by Arrowstreet Capital, which reported holding $130.7 million worth of stock at the end of December. It was followed by First Pacific Advisors LLC with a $37.5 million position. Other investors bullish on the company included Renaissance Technologies, Te Ahumairangi Investment Management, and Blackcrane Capital. In terms of the portfolio weights assigned to each position Blackcrane Capital allocated the biggest weight to Open Text Corporation (NASDAQ:OTEX), around 10.78% of its 13F portfolio. Te Ahumairangi Investment Management is also relatively very bullish on the stock, dishing out 0.94 percent of its 13F equity portfolio to OTEX.

Due to the fact that Open Text Corporation (NASDAQ:OTEX) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedge funds that elected to cut their entire stakes by the end of the first quarter. It's worth mentioning that Israel Englander's Millennium Management cut the largest investment of the "upper crust" of funds followed by Insider Monkey, worth close to $12.6 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also sold off its stock, about $4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 2 funds by the end of the first quarter.

Let's now review hedge fund activity in other stocks similar to Open Text Corporation (NASDAQ:OTEX). We will take a look at Icahn Enterprises LP (NASDAQ:IEP), Brown & Brown, Inc. (NYSE:BRO), Enel Americas S.A. (NYSE:ENIA), F5 Networks, Inc. (NASDAQ:FFIV), Bentley Systems, Incorporated (NASDAQ:BSY), LKQ Corporation (NASDAQ:LKQ), and Packaging Corporation Of America (NYSE:PKG). All of these stocks' market caps are closest to OTEX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IEP,4,11950636,0 BRO,25,915409,-4 ENIA,11,116873,2 FFIV,26,871819,-8 BSY,22,109974,3 LKQ,36,1543090,-14 PKG,29,245296,13 Average,21.9,2250442,-1.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.9 hedge funds with bullish positions and the average amount invested in these stocks was $2250 million. That figure was $216 million in OTEX's case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 4 bullish hedge fund positions. Open Text Corporation (NASDAQ:OTEX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for OTEX is 43.6. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately OTEX wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); OTEX investors were disappointed as the stock returned 8.1% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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