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Were Hedge Funds Right About Selling Healthequity Inc (HQY)?

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The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We have processed the filings of the more than 866 world-class investment firms that we track and now have access to the collective wisdom contained in these filings, which are based on their March 31st holdings, data that is available nowhere else. Should you consider Healthequity Inc (NASDAQ:HQY) for your portfolio? We'll look to this invaluable collective wisdom for the answer.

Is Healthequity Inc (NASDAQ:HQY) a buy here? The smart money was reducing their bets on the stock. The number of bullish hedge fund positions fell by 2 recently. Healthequity Inc (NASDAQ:HQY) was in 18 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 24. Our calculations also showed that HQY isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Michael Gelband of ExodusPoint 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. You can subscribe to our free daily newsletter on our homepage. Now we're going to take a look at the new hedge fund action regarding Healthequity Inc (NASDAQ:HQY).

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

At Q1's end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the fourth quarter of 2020. On the other hand, there were a total of 19 hedge funds with a bullish position in HQY a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is HQY A Good Stock To Buy?
Is HQY A Good Stock To Buy?

The largest stake in Healthequity Inc (NASDAQ:HQY) was held by Echo Street Capital Management, which reported holding $115.3 million worth of stock at the end of December. It was followed by Citadel Investment Group with a $25.4 million position. Other investors bullish on the company included CaaS Capital, Millennium Management, and Motley Fool Asset Management. In terms of the portfolio weights assigned to each position Echo Street Capital Management allocated the biggest weight to Healthequity Inc (NASDAQ:HQY), around 1.03% of its 13F portfolio. Greenhouse Funds is also relatively very bullish on the stock, designating 1 percent of its 13F equity portfolio to HQY.

Judging by the fact that Healthequity Inc (NASDAQ:HQY) has faced a decline in interest from the smart money, it's safe to say that there was a specific group of fund managers that decided to sell off their entire stakes in the first quarter. It's worth mentioning that Ryan Frick and Oliver Evans's Dorsal Capital Management said goodbye to the biggest investment of all the hedgies watched by Insider Monkey, comprising an estimated $69.7 million in stock, and Kris Jenner, Gordon Bussard, Graham McPhail's Rock Springs Capital Management was right behind this move, as the fund said goodbye to about $5.2 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 2 funds in the first quarter.

Let's now review hedge fund activity in other stocks similar to Healthequity Inc (NASDAQ:HQY). We will take a look at TFS Financial Corporation (NASDAQ:TFSL), Lemonade, Inc. (NYSE:LMND), SunPower Corporation (NASDAQ:SPWR), Ollie's Bargain Outlet Holdings Inc (NASDAQ:OLLI), National Instruments Corporation (NASDAQ:NATI), Eastgroup Properties Inc (NYSE:EGP), and Unum Group (NYSE:UNM). This group of stocks' market valuations resemble HQY's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TFSL,6,145686,-4 LMND,16,159616,3 SPWR,18,182419,-6 OLLI,24,194324,3 NATI,21,248825,3 EGP,13,82942,0 UNM,33,283684,8 Average,18.7,185357,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.7 hedge funds with bullish positions and the average amount invested in these stocks was $185 million. That figure was $221 million in HQY's case. Unum Group (NYSE:UNM) is the most popular stock in this table. On the other hand TFS Financial Corporation (NASDAQ:TFSL) is the least popular one with only 6 bullish hedge fund positions. Healthequity Inc (NASDAQ:HQY) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HQY is 47.7. 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 HQY wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); HQY investors were disappointed as the stock returned 9.4% 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.