Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let’s see whether NICE Ltd. (NASDAQ:NICE) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Is NICE Ltd. (NASDAQ:NICE) ready to rally soon? The smart money is becoming more confident. The number of bullish hedge fund positions improved by 2 in recent months. Our calculations also showed that NICE isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). NICE was in 19 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 17 hedge funds in our database with NICE holdings at the end of the previous quarter.
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 41 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.
Wall Street Bull
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a look at the key hedge fund action encompassing NICE Ltd. (NASDAQ:NICE).
What have hedge funds been doing with NICE Ltd. (NASDAQ:NICE)?
At the end of the fourth quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NICE over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, RGM Capital held the most valuable stake in NICE Ltd. (NASDAQ:NICE), which was worth $116.8 million at the end of the third quarter. On the second spot was SQN Investors which amassed $93.9 million worth of shares. Shannon River Fund Management, Arrowstreet Capital, and McKinley Capital 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 Blackcrane Capital allocated the biggest weight to NICE Ltd. (NASDAQ:NICE), around 10.26% of its 13F portfolio. SQN Investors is also relatively very bullish on the stock, earmarking 8.66 percent of its 13F equity portfolio to NICE.
As industrywide interest jumped, key hedge funds were leading the bulls’ herd. Intrinsic Edge Capital, managed by Mark Coe, created the most outsized position in NICE Ltd. (NASDAQ:NICE). Intrinsic Edge Capital had $3.1 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also made a $1.6 million investment in the stock during the quarter. The other funds with brand new NICE positions are Matthew Hulsizer’s PEAK6 Capital Management and Donald Sussman’s Paloma Partners.
Let’s check out hedge fund activity in other stocks similar to NICE Ltd. (NASDAQ:NICE). These stocks are Apache Corporation (NYSE:APA), DXC Technology Company (NYSE:DXC), Sarepta Therapeutics Inc (NASDAQ:SRPT), and DaVita Inc (NYSE:DVA). All of these stocks’ market caps match NICE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| APA | 34 | 608891 | 6 |
| DXC | 47 | 1481279 | 6 |
| SRPT | 42 | 1108005 | 6 |
| DVA | 38 | 3962351 | 1 |
| Average | 40.25 | 1790132 | 4.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $1790 million. That figure was $426 million in NICE’s case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand Apache Corporation (NYSE:APA) is the least popular one with only 34 bullish hedge fund positions. Compared to these stocks NICE Ltd. (NASDAQ:NICE) is even less popular than APA. Hedge funds clearly dropped the ball on NICE as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on NICE as the stock returned -17.4% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
