Hedge Funds Are Dumping Cerence Inc. (CRNC)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Cerence Inc. (NASDAQ:CRNC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Cerence Inc. (NASDAQ:CRNC) has experienced a decrease in enthusiasm from smart money in recent months. Our calculations also showed that CRNC 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.

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 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 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.

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a peek at the recent hedge fund action encompassing Cerence Inc. (NASDAQ:CRNC).

What does smart money think about Cerence Inc. (NASDAQ:CRNC)?

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -50% from the fourth quarter of 2019. By comparison, 0 hedge funds held shares or bullish call options in CRNC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Cerence Inc. (NASDAQ:CRNC) was held by Brahman Capital, which reported holding $20.7 million worth of stock at the end of September. It was followed by Isomer Partners with a $19.6 million position. Other investors bullish on the company included AQR Capital Management, Millennium Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Isomer Partners allocated the biggest weight to Cerence Inc. (NASDAQ:CRNC), around 6.98% of its 13F portfolio. Brahman Capital is also relatively very bullish on the stock, designating 2.44 percent of its 13F equity portfolio to CRNC.

Judging by the fact that Cerence Inc. (NASDAQ:CRNC) has witnessed bearish sentiment from hedge fund managers, we can see that there were a few fund managers who were dropping their positions entirely in the first quarter. Intriguingly, Robert G. Moses’s RGM Capital sold off the biggest position of the “upper crust” of funds tracked by Insider Monkey, comprising about $18.2 million in stock. Matthew Knauer and Mina Faltas’s fund, Nokota Management, also cut its stock, about $9.1 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 11 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Cerence Inc. (NASDAQ:CRNC) but similarly valued. These stocks are Quotient Technology Inc (NYSE:QUOT), SMART Global Holdings, Inc. (NASDAQ:SGH), Linx S.A. (NYSE:LINX), and Range Resources Corp. (NYSE:RRC). This group of stocks’ market values are closest to CRNC’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $168 million. That figure was $66 million in CRNC’s case. Range Resources Corp. (NYSE:RRC) is the most popular stock in this table. On the other hand Linx S.A. (NYSE:LINX) is the least popular one with only 5 bullish hedge fund positions. Cerence Inc. (NASDAQ:CRNC) is not the least popular stock in this group but hedge fund interest is still below 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on CRNC as the stock returned 165.2% during the second quarter and outperformed the market by an even larger margin.

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