Did Hedge Funds Make The Right Call On NextGen Healthcare, Inc. (NXGN)?

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 NextGen Healthcare, Inc. (NASDAQ:NXGN) and determine whether hedge funds had an edge regarding this stock.

NextGen Healthcare, Inc. (NASDAQ:NXGN) investors should pay attention to an increase in activity from the world’s largest hedge funds in recent months. NXGN was in 21 hedge funds’ portfolios at the end of the first quarter of 2020. There were 16 hedge funds in our database with NXGN positions at the end of the previous quarter. Our calculations also showed that NXGN 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.

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a look at the fresh hedge fund action regarding NextGen Healthcare, Inc. (NASDAQ:NXGN).

What does smart money think about NextGen Healthcare, Inc. (NASDAQ:NXGN)?

Heading into the second quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 31% from the previous quarter. By comparison, 13 hedge funds held shares or bullish call options in NXGN a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in NextGen Healthcare, Inc. (NASDAQ:NXGN), which was worth $5.1 million at the end of the third quarter. On the second spot was Millennium Management which amassed $4.7 million worth of shares. Arrowstreet Capital, D E Shaw, 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 Zebra Capital Management allocated the biggest weight to NextGen Healthcare, Inc. (NASDAQ:NXGN), around 0.46% of its 13F portfolio. Sio Capital is also relatively very bullish on the stock, setting aside 0.32 percent of its 13F equity portfolio to NXGN.

Consequently, some big names have been driving this bullishness. Millennium Management, managed by Israel Englander, initiated the most valuable position in NextGen Healthcare, Inc. (NASDAQ:NXGN). Millennium Management had $4.7 million invested in the company at the end of the quarter. Renaissance Technologies also made a $1 million investment in the stock during the quarter. The other funds with brand new NXGN positions are Michael Castor’s Sio Capital, Greg Eisner’s Engineers Gate Manager, and Thomas Bailard’s Bailard Inc.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as NextGen Healthcare, Inc. (NASDAQ:NXGN) but similarly valued. We will take a look at Partner Communications Company Ltd (NASDAQ:PTNR), General American Investors Company, Inc. (NYSE:GAM), Myovant Sciences Ltd. (NYSE:MYOV), and Limelight Networks, Inc. (NASDAQ:LLNW). All of these stocks’ market caps resemble NXGN’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $40 million. That figure was $27 million in NXGN’s case. Limelight Networks, Inc. (NASDAQ:LLNW) is the most popular stock in this table. On the other hand Partner Communications Company Ltd (NASDAQ:PTNR) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks NextGen Healthcare, Inc. (NASDAQ:NXGN) 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 gained 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. Unfortunately NXGN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NXGN were disappointed as the stock returned 12.5% since the end of the first quarter 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 most of these stocks already outperformed the market in 2020.

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