At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Zendesk Inc (NYSE:ZEN) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Is Zendesk Inc (NYSE:ZEN) a healthy stock for your portfolio? Investors who are in the know were becoming less confident. The number of long hedge fund bets fell by 6 lately. Our calculations also showed that ZEN 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_260193" align="aligncenter" width="400"] Keith Meister of Corvex Capital[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's take a peek at the recent hedge fund action surrounding Zendesk Inc (NYSE:ZEN).
How have hedgies been trading Zendesk Inc (NYSE:ZEN)?
At the end of the first quarter, a total of 55 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZEN over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Zendesk Inc (NYSE:ZEN) was held by Whale Rock Capital Management, which reported holding $177.5 million worth of stock at the end of September. It was followed by SCGE Management with a $147.1 million position. Other investors bullish on the company included Cadian Capital, Corvex Capital, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Toronado Partners allocated the biggest weight to Zendesk Inc (NYSE:ZEN), around 10.37% of its 13F portfolio. Cota Capital is also relatively very bullish on the stock, setting aside 8.5 percent of its 13F equity portfolio to ZEN.
Seeing as Zendesk Inc (NYSE:ZEN) has experienced declining sentiment from hedge fund managers, logic holds that there were a few money managers who sold off their full holdings last quarter. At the top of the heap, Edmond M. Safra's EMS Capital cut the biggest investment of the "upper crust" of funds followed by Insider Monkey, worth close to $97.8 million in stock, and Josh Resnick's Jericho Capital Asset Management was right behind this move, as the fund sold off about $69.1 million worth. These moves are interesting, as total hedge fund interest fell by 6 funds last quarter.
Let's now review hedge fund activity in other stocks similar to Zendesk Inc (NYSE:ZEN). These stocks are Annaly Capital Management, Inc. (NYSE:NLY), Henry Schein, Inc. (NASDAQ:HSIC), Centrais Eletricas Brasileiras SA (NYSE:EBR), and Avantor, Inc. (NYSE:AVTR). This group of stocks' market valuations are similar to ZEN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NLY,27,224564,6 HSIC,35,1058541,-1 EBR,5,9710,-2 AVTR,29,521496,1 Average,24,453578,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $454 million. That figure was $1263 million in ZEN's case. Henry Schein, Inc. (NASDAQ:HSIC) is the most popular stock in this table. On the other hand Centrais Eletricas Brasileiras SA (NYSE:EBR) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Zendesk Inc (NYSE:ZEN) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on ZEN as the stock returned 38.3% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.