U.S. Markets close in 6 hrs 11 mins

Workday Inc (WDAY): Hedge Fund Enthusiasm Subsiding

Reymerlyn Martin

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Workday Inc (NASDAQ:WDAY).

Workday Inc (NASDAQ:WDAY) was in 39 hedge funds' portfolios at the end of September. WDAY shareholders have witnessed a decrease in activity from the world's largest hedge funds recently. There were 41 hedge funds in our database with WDAY holdings at the end of the previous quarter. Our calculations also showed that WDAY isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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' 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_26578" align="aligncenter" width="359"] Stanley Druckenmiller of Duquesne Capital[/caption]

Stan Druckenmiller DUQUESNE CAPITAL

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the recent hedge fund action encompassing Workday Inc (NASDAQ:WDAY).

Hedge fund activity in Workday Inc (NASDAQ:WDAY)

At Q3's end, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from one quarter earlier. On the other hand, there were a total of 30 hedge funds with a bullish position in WDAY a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

WDAY_nov2019

Among these funds, Bares Capital Management held the most valuable stake in Workday Inc (NASDAQ:WDAY), which was worth $348.1 million at the end of the third quarter. On the second spot was Alkeon Capital Management which amassed $213.8 million worth of shares. Whale Rock Capital Management, Duquesne Capital, and Matrix Capital Management 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 Half Sky Capital allocated the biggest weight to Workday Inc (NASDAQ:WDAY), around 17% of its portfolio. Bares Capital Management is also relatively very bullish on the stock, setting aside 10.45 percent of its 13F equity portfolio to WDAY.

Judging by the fact that Workday Inc (NASDAQ:WDAY) has experienced falling interest from the aggregate hedge fund industry, we can see that there exists a select few hedge funds who sold off their entire stakes by the end of the third quarter. It's worth mentioning that Rajiv Jain's GQG Partners dropped the biggest stake of all the hedgies followed by Insider Monkey, comprising an estimated $189.3 million in stock. Gabriel Plotkin's fund, Melvin Capital Management, also cut its stock, about $87.4 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 2 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks similar to Workday Inc (NASDAQ:WDAY). These stocks are Moody's Corporation (NYSE:MCO), AFLAC Incorporated (NYSE:AFL), Travelers Companies Inc (NYSE:TRV), and Ferrari N.V. (NYSE:RACE). All of these stocks' market caps resemble WDAY's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MCO,48,7835478,9 AFL,27,528066,4 TRV,34,1514479,8 RACE,32,1530799,2 Average,35.25,2852206,5.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $2852 million. That figure was $1240 million in WDAY's case. Moody's Corporation (NYSE:MCO) is the most popular stock in this table. On the other hand AFLAC Incorporated (NYSE:AFL) is the least popular one with only 27 bullish hedge fund positions. Workday Inc (NASDAQ:WDAY) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately WDAY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WDAY were disappointed as the stock returned 5.4% during the fourth quarter (through the end of November) 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.

Related Content