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 Paylocity Holding Corp (NASDAQ:PCTY) and determine whether hedge funds had an edge regarding this stock.
Is Paylocity Holding Corp (NASDAQ:PCTY) a buy here? The best stock pickers were taking an optimistic view. The number of long hedge fund positions went up by 7 lately. Our calculations also showed that PCTY 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). PCTY was in 33 hedge funds’ portfolios at the end of the first quarter of 2020. There were 26 hedge funds in our database with PCTY holdings at the end of the previous quarter.
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.
Fred DiSanto of Ancora Advisors
At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. With all of this in mind we’re going to analyze the key hedge fund action regarding Paylocity Holding Corp (NASDAQ:PCTY).
What have hedge funds been doing with Paylocity Holding Corp (NASDAQ:PCTY)?
At the end of the first quarter, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 27% from the previous quarter. On the other hand, there were a total of 24 hedge funds with a bullish position in PCTY a year ago. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
Among these funds, Adams Street Partners held the most valuable stake in Paylocity Holding Corp (NASDAQ:PCTY), which was worth $153.5 million at the end of the third quarter. On the second spot was Alkeon Capital Management which amassed $61.8 million worth of shares. Zevenbergen Capital Investments, Echo Street Capital Management, and Two Sigma Advisors 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 Adams Street Partners allocated the biggest weight to Paylocity Holding Corp (NASDAQ:PCTY), around 38.3% of its 13F portfolio. Diker Management is also relatively very bullish on the stock, setting aside 4.95 percent of its 13F equity portfolio to PCTY.
Consequently, key hedge funds have been driving this bullishness. Diker Management, managed by Mark N. Diker, established the biggest position in Paylocity Holding Corp (NASDAQ:PCTY). Diker Management had $11.7 million invested in the company at the end of the quarter. Frederick DiSanto’s Ancora Advisors also initiated a $4.5 million position during the quarter. The other funds with brand new PCTY positions are Greg Eisner’s Engineers Gate Manager, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, and Alec Litowitz and Ross Laser’s Magnetar Capital.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Paylocity Holding Corp (NASDAQ:PCTY) but similarly valued. These stocks are GFL Environmental Inc. (NYSE:GFL), Five9 Inc (NASDAQ:FIVN), Columbia Sportswear Company (NASDAQ:COLM), and Hawaiian Electric Industries, Inc. (NYSE:HE). This group of stocks’ market values are closest to PCTY’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GFL | 10 | 150736 | 10 |
| FIVN | 33 | 715609 | -2 |
| COLM | 15 | 51797 | -8 |
| HE | 13 | 190462 | -4 |
| Average | 17.75 | 277151 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $277 million. That figure was $410 million in PCTY’s case. Five9 Inc (NASDAQ:FIVN) is the most popular stock in this table. On the other hand GFL Environmental Inc. (NYSE:GFL) is the least popular one with only 10 bullish hedge fund positions. Paylocity Holding Corp (NASDAQ:PCTY) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on PCTY as the stock returned 65.2% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.
