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Were Hedge Funds Right About Souring On Paycom Software Inc (PAYC)?

Asma UL Husna

There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don't cover. Because of Carl Icahn and other elite funds' exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze Paycom Software Inc (NYSE:PAYC).

Is Paycom Software Inc (NYSE:PAYC) undervalued? Hedge funds are taking a pessimistic view. The number of bullish hedge fund bets were trimmed by 1 recently. Our calculations also showed that PAYC isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

PAYC_oct2019

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to view the new hedge fund action regarding Paycom Software Inc (NYSE:PAYC).

How are hedge funds trading Paycom Software Inc (NYSE:PAYC)?

At the end of the second quarter, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PAYC over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Dmitry Balyasny

The largest stake in Paycom Software Inc (NYSE:PAYC) was held by Arrowstreet Capital, which reported holding $63.6 million worth of stock at the end of March. It was followed by Fisher Asset Management with a $58.8 million position. Other investors bullish on the company included Two Sigma Advisors, AQR Capital Management, and Citadel Investment Group.

Since Paycom Software Inc (NYSE:PAYC) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there were a few money managers that slashed their entire stakes by the end of the second quarter. At the top of the heap, Renaissance Technologies dropped the biggest investment of the 750 funds watched by Insider Monkey, worth close to $13.2 million in stock. Michael Gelband's fund, ExodusPoint Capital, also said goodbye to its stock, about $5.6 million worth. These moves are interesting, as total hedge fund interest fell by 1 funds by the end of the second quarter.

Let's also examine hedge fund activity in other stocks similar to Paycom Software Inc (NYSE:PAYC). We will take a look at DENTSPLY SIRONA Inc. (NASDAQ:XRAY), Celanese Corporation (NYSE:CE), Erie Indemnity Company (NASDAQ:ERIE), and Host Hotels and Resorts Inc (NYSE:HST). This group of stocks' market caps are closest to PAYC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XRAY,29,2222723,-2 CE,20,635432,-1 ERIE,12,89460,-5 HST,28,513326,1 Average,22.25,865235,-1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $865 million. That figure was $397 million in PAYC's case. DENTSPLY SIRONA Inc. (NASDAQ:XRAY) is the most popular stock in this table. On the other hand Erie Indemnity Company (NASDAQ:ERIE) is the least popular one with only 12 bullish hedge fund positions. Paycom Software Inc (NYSE:PAYC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately PAYC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PAYC were disappointed as the stock returned -7.6% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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