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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Zuora, Inc. (NYSE:ZUO) and determine whether hedge funds had an edge regarding this stock.
Is Zuora, Inc. (NYSE:ZUO) a buy here? The smart money was getting less bullish. The number of bullish hedge fund bets went down by 2 recently. Zuora, Inc. (NYSE:ZUO) was in 21 hedge funds' portfolios at the end of June. The all time high for this statistics is 26. Our calculations also showed that ZUO isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
In the 21st century investor’s toolkit there are many signals shareholders employ to evaluate publicly traded companies. A couple of the most innovative signals are hedge fund and insider trading interest. Our researchers have shown that, historically, those who follow the best picks of the best fund managers can outperform the market by a significant amount (see the details here).
Philip Hempleman of Ardsley Partners
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind we're going to review the latest hedge fund action encompassing Zuora, Inc. (NYSE:ZUO).
Hedge fund activity in Zuora, Inc. (NYSE:ZUO)
At second quarter's end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ZUO over the last 20 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Hound Partners held the most valuable stake in Zuora, Inc. (NYSE:ZUO), which was worth $36.6 million at the end of the third quarter. On the second spot was Bares Capital Management which amassed $13.3 million worth of shares. Point72 Asset Management, Renaissance Technologies, and Citadel Investment Group 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 Hound Partners allocated the biggest weight to Zuora, Inc. (NYSE:ZUO), around 3.3% of its 13F portfolio. Think Investments is also relatively very bullish on the stock, setting aside 1.54 percent of its 13F equity portfolio to ZUO.
Seeing as Zuora, Inc. (NYSE:ZUO) has experienced a decline in interest from the entirety of the hedge funds we track, it's easy to see that there were a few funds who sold off their full holdings last quarter. Interestingly, Amish Mehta's SQN Investors sold off the largest position of all the hedgies tracked by Insider Monkey, worth close to $25.9 million in stock. Israel Englander's fund, Millennium Management, also dumped its stock, about $3.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds last quarter.
Let's also examine hedge fund activity in other stocks similar to Zuora, Inc. (NYSE:ZUO). We will take a look at LTC Properties Inc (NYSE:LTC), Turquoise Hill Resources Ltd (NYSE:TRQ), Super Micro Computer, Inc. (NASDAQ:SMCI), Boise Cascade Co (NYSE:BCC), Rattler Midstream LP (NASDAQ:RTLR), National Research Corporation (NASDAQ:NRC), and Scientific Games Corp (NASDAQ:SGMS). This group of stocks' market values resemble ZUO's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LTC,15,18655,4 TRQ,13,268820,-1 SMCI,22,422478,-2 BCC,13,42926,-5 RTLR,7,94193,-2 NRC,7,49108,-1 SGMS,24,374104,2 Average,14.4,181469,-0.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.4 hedge funds with bullish positions and the average amount invested in these stocks was $181 million. That figure was $104 million in ZUO's case. Scientific Games Corp (NASDAQ:SGMS) is the most popular stock in this table. On the other hand Rattler Midstream LP (NASDAQ:RTLR) is the least popular one with only 7 bullish hedge fund positions. Zuora, Inc. (NYSE:ZUO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ZUO is 68.4. 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 positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately ZUO wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ZUO were disappointed as the stock returned -18.9% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.