Hedge Funds Are Done Buying Change Healthcare Inc. (CHNG)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Change Healthcare Inc. (NASDAQ:CHNG) based on that data and determine whether they were really smart about the stock.

Change Healthcare Inc. (NASDAQ:CHNG) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 47 hedge funds’ portfolios at the end of June. Our calculations also showed that CHNG 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). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as NeoGenomics, Inc. (NASDAQ:NEO), bluebird bio Inc (NASDAQ:BLUE), and Enstar Group Ltd. (NASDAQ:ESGR) to gather more data points. Our calculations also showed that CHNG 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.

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 56 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.

Ricky Sandler of Eminence Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we’re going to view the key hedge fund action encompassing Change Healthcare Inc. (NASDAQ:CHNG).

What does smart money think about Change Healthcare Inc. (NASDAQ:CHNG)?

Heading into the third quarter of 2020, a total of 47 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CHNG over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Eminence Capital held the most valuable stake in Change Healthcare Inc. (NASDAQ:CHNG), which was worth $179.1 million at the end of the third quarter. On the second spot was Camber Capital Management which amassed $178.1 million worth of shares. Park West Asset Management, Greenlight Capital, and Hawk Ridge 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 Camber Capital Management allocated the biggest weight to Change Healthcare Inc. (NASDAQ:CHNG), around 10.19% of its 13F portfolio. Simcoe Capital Management is also relatively very bullish on the stock, setting aside 9.09 percent of its 13F equity portfolio to CHNG.

Since Change Healthcare Inc. (NASDAQ:CHNG) has faced falling interest from the entirety of the hedge funds we track, we can see that there exists a select few hedgies that elected to cut their full holdings heading into Q3. Intriguingly, Amish Mehta’s SQN Investors dropped the biggest stake of all the hedgies monitored by Insider Monkey, worth about $42.9 million in stock, and James Dinan’s York Capital Management was right behind this move, as the fund dumped about $16.4 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Change Healthcare Inc. (NASDAQ:CHNG) but similarly valued. We will take a look at NeoGenomics, Inc. (NASDAQ:NEO), bluebird bio Inc (NASDAQ:BLUE), Enstar Group Ltd. (NASDAQ:ESGR), Rayonier Inc. (NYSE:RYN), UniFirst Corp (NYSE:UNF), Unum Group (NYSE:UNM), and Marriott Vacations Worldwide Corporation (NYSE:VAC). This group of stocks’ market caps are closest to CHNG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.4 hedge funds with bullish positions and the average amount invested in these stocks was $252 million. That figure was $1112 million in CHNG’s case. bluebird bio Inc (NASDAQ:BLUE) is the most popular stock in this table. On the other hand Enstar Group Ltd. (NASDAQ:ESGR) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Change Healthcare Inc. (NASDAQ:CHNG) is more popular among hedge funds. Our overall hedge fund sentiment score for CHNG is 85. 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. 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 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on CHNG as the stock returned 26.3% since the end of June 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.

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