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Were Hedge Funds Right About Warming Up To NICE Ltd (NICE)?

Abigail Fisher

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtNICE Ltd (NASDAQ:NICE) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

NICE Ltd (NASDAQ:NICE) has experienced an increase in enthusiasm from smart money recently. Our calculations also showed that NICE isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_769366" align="aligncenter" width="399"] Robert Moses of RGM Capital[/caption]

Robert Moses RGM Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we're going to analyze the latest hedge fund action regarding NICE Ltd (NASDAQ:NICE).

How are hedge funds trading NICE Ltd (NASDAQ:NICE)?

At Q1's end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 16% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in NICE a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to Insider Monkey's hedge fund database, RGM Capital, managed by Robert G. Moses, holds the number one position in NICE Ltd (NASDAQ:NICE). RGM Capital has a $110.8 million position in the stock, comprising 8.7% of its 13F portfolio. The second largest stake is held by SQN Investors, led by Amish Mehta, holding a $83.4 million position; the fund has 8.4% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish include Spencer M. Waxman's Shannon River Fund Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Renaissance Technologies. In terms of the portfolio weights assigned to each position Blackcrane Capital allocated the biggest weight to NICE Ltd (NASDAQ:NICE), around 8.77% of its 13F portfolio. RGM Capital is also relatively very bullish on the stock, earmarking 8.71 percent of its 13F equity portfolio to NICE.

As industrywide interest jumped, specific money managers were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the largest position in NICE Ltd (NASDAQ:NICE). Balyasny Asset Management had $4.4 million invested in the company at the end of the quarter. Thomas Lee's Lee Capital Management also made a $1.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Doron Breen and Mori Arkin's Sphera Global Healthcare Fund, Greg Eisner's Engineers Gate Manager, and Paul Marshall and Ian Wace's Marshall Wace LLP.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as NICE Ltd (NASDAQ:NICE) but similarly valued. We will take a look at Gartner Inc (NYSE:IT), Pinterest, Inc. (NYSE:PINS), GDS Holdings Limited (NASDAQ:GDS), and CarMax Inc (NYSE:KMX). This group of stocks' market values are similar to NICE's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IT,32,973145,6 PINS,38,410292,1 GDS,41,1618404,7 KMX,37,1084332,-13 Average,37,1021543,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 37 hedge funds with bullish positions and the average amount invested in these stocks was $1022 million. That figure was $374 million in NICE's case. GDS Holdings Limited (NASDAQ:GDS) is the most popular stock in this table. On the other hand Gartner Inc (NYSE:IT) is the least popular one with only 32 bullish hedge fund positions. Compared to these stocks NICE Ltd (NASDAQ:NICE) is even less popular than IT. Hedge funds clearly dropped the ball on NICE as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on NICE as the stock returned 31.8% in the second quarter and outperformed the market by an even larger margin.

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

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