Hedge Funds Aren’t Crazy About Paychex (PAYX) Anymore

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 Paychex, Inc. (NASDAQ:PAYX) and determine whether hedge funds had an edge regarding this stock.

Is Paychex, Inc. (NASDAQ:PAYX) a first-rate investment right now? The best stock pickers were in a bearish mood. The number of long hedge fund bets went down by 5 in recent months. Paychex, Inc. (NASDAQ:PAYX) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 41. Our calculations also showed that PAYX 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.

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. 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. Keeping this in mind let’s go over the new hedge fund action regarding Paychex, Inc. (NASDAQ:PAYX).

What does smart money think about Paychex, Inc. (NASDAQ:PAYX)?

At Q2’s end, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the previous quarter. By comparison, 34 hedge funds held shares or bullish call options in PAYX a year ago. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Select Equity Group, managed by Robert Joseph Caruso, holds the biggest position in Paychex, Inc. (NASDAQ:PAYX). Select Equity Group has a $389.3 million position in the stock, comprising 2.2% of its 13F portfolio. On Select Equity Group’s heels is D. E. Shaw of D E Shaw, with a $79.4 million position; 0.1% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism consist of Greg Poole’s Echo Street Capital Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Lunia Capital allocated the biggest weight to Paychex, Inc. (NASDAQ:PAYX), around 2.58% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, designating 2.24 percent of its 13F equity portfolio to PAYX.

Since Paychex, Inc. (NASDAQ:PAYX) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there is a sect of money managers that decided to sell off their full holdings by the end of the second quarter. It’s worth mentioning that Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, comprising about $11.7 million in stock, and David Einhorn’s Greenlight Capital was right behind this move, as the fund said goodbye to about $11.6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 5 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Paychex, Inc. (NASDAQ:PAYX) but similarly valued. We will take a look at IQVIA Holdings, Inc. (NYSE:IQV), The Hershey Company (NYSE:HSY), CRH PLC (NYSE:CRH), ING Groep N.V. (NYSE:ING), TE Connectivity Ltd. (NYSE:TEL), American International Group Inc (NYSE:AIG), and Cadence Design Systems Inc (NASDAQ:CDNS). This group of stocks’ market valuations match PAYX’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.7 hedge funds with bullish positions and the average amount invested in these stocks was $1376 million. That figure was $877 million in PAYX’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand CRH PLC (NYSE:CRH) is the least popular one with only 7 bullish hedge fund positions. Paychex, Inc. (NASDAQ:PAYX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PAYX is 50.9. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately PAYX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PAYX were disappointed as the stock returned 1.8% during the same time period 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.

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