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Were Hedge Funds Right About Upwork Inc. (UPWK)?

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The Insider Monkey team has completed processing the quarterly 13F filings for the June quarter submitted by the hedge funds and other money managers included in our extensive database. Most hedge fund investors experienced strong gains on the back of a strong market performance, which certainly propelled them to adjust their equity holdings so as to maintain the desired risk profile. As a result, the relevancy of these public filings and their content is indisputable, as they may reveal numerous high-potential stocks. The following article will discuss the smart money sentiment towards Upwork Inc. (NASDAQ:UPWK).

Upwork Inc. (NASDAQ:UPWK) has experienced a decrease in hedge fund sentiment in recent months. Upwork Inc. (NASDAQ:UPWK) was in 26 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 34. There were 32 hedge funds in our database with UPWK positions at the end of the first quarter. Our calculations also showed that UPWK isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 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.

Chuck Royce
Chuck Royce

Chuck Royce of Royce & Associates

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. With all of this in mind we're going to analyze the latest hedge fund action surrounding Upwork Inc. (NASDAQ:UPWK).

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

At second quarter's end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 25 hedge funds with a bullish position in UPWK a year ago. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Is UPWK A Good Stock To Buy?
Is UPWK A Good Stock To Buy?

Among these funds, SRS Investment Management held the most valuable stake in Upwork Inc. (NASDAQ:UPWK), which was worth $117.4 million at the end of the second quarter. On the second spot was Ancient Art (Teton Capital) which amassed $67.8 million worth of shares. Royce & Associates, Driehaus Capital, and Kent Lake Capital 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 IvyRock Asset Management allocated the biggest weight to Upwork Inc. (NASDAQ:UPWK), around 10.83% of its 13F portfolio. Kent Lake Capital is also relatively very bullish on the stock, designating 9.82 percent of its 13F equity portfolio to UPWK.

Seeing as Upwork Inc. (NASDAQ:UPWK) has experienced a decline in interest from the smart money, we can see that there exists a select few hedgies who sold off their full holdings by the end of the second quarter. It's worth mentioning that David Brown's Hawk Ridge Management cut the largest investment of the 750 funds followed by Insider Monkey, worth an estimated $83.8 million in stock. Jack Woodruff's fund, Candlestick Capital Management, also said goodbye to its stock, about $31.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 6 funds by the end of the second quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Upwork Inc. (NASDAQ:UPWK) but similarly valued. These stocks are IAA, Inc. (NYSE:IAA), Gildan Activewear Inc (NYSE:GIL), The New York Times Company (NYSE:NYT), The AZEK Company Inc. (NYSE:AZEK), Woori Financial Group Inc. (NYSE:WF), People's United Financial, Inc. (NASDAQ:PBCT), and Casey's General Stores, Inc. (NASDAQ:CASY). This group of stocks' market caps resemble UPWK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IAA,33,829694,-2 GIL,19,726018,2 NYT,48,2224644,0 AZEK,37,407782,8 WF,2,3694,0 PBCT,24,219174,4 CASY,24,130468,13 Average,26.7,648782,3.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $649 million. That figure was $428 million in UPWK's case. The New York Times Company (NYSE:NYT) is the most popular stock in this table. On the other hand Woori Financial Group Inc. (NYSE:WF) is the least popular one with only 2 bullish hedge fund positions. Upwork Inc. (NASDAQ:UPWK) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for UPWK is 48. 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 29.6% in 2021 through November 5th and surpassed the market again by 3.1 percentage points. Unfortunately UPWK wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); UPWK investors were disappointed as the stock returned -15.9% since the end of June (through 11/5) 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.