Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Zuora, Inc. (NYSE:ZUO).
Is Zuora, Inc. (NYSE:ZUO) an outstanding stock to buy now? Investors who are in the know are getting more bullish. The number of bullish hedge fund positions inched up by 4 in recent months. Our calculations also showed that ZUO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Colin Moran of Abdiel Capital Advisors
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a glance at the fresh hedge fund action surrounding Zuora, Inc. (NYSE:ZUO).
How have hedgies been trading Zuora, Inc. (NYSE:ZUO)?
Heading into the fourth quarter of 2019, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from the previous quarter. On the other hand, there were a total of 15 hedge funds with a bullish position in ZUO a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Brian Bares’s Bares Capital Management has the most valuable position in Zuora, Inc. (NYSE:ZUO), worth close to $40.9 million, corresponding to 1.2% of its total 13F portfolio. Coming in second is Amish Mehta of SQN Investors, with a $28.4 million position; 3% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism encompass Colin Moran’s Abdiel Capital Advisors, Greg Poole’s Echo Street Capital Management and Panayotis Takis Sparaggis’s Alkeon Capital Management. In terms of the portfolio weights assigned to each position SQN Investors allocated the biggest weight to Zuora, Inc. (NYSE:ZUO), around 2.98% of its 13F portfolio. Potrero Capital Research is also relatively very bullish on the stock, designating 2.53 percent of its 13F equity portfolio to ZUO.
There weren’t any hedge funds initiating brand new positions in the stock during the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Zuora, Inc. (NYSE:ZUO) but similarly valued. These stocks are Central Garden & Pet Co (NASDAQ:CENT), Hailiang Education Group Inc. (NASDAQ:HLG), WestAmerica Bancorp. (NASDAQ:WABC), and SPX FLOW, Inc. (NYSE:FLOW). All of these stocks’ market caps are similar to ZUO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CENT | 23 | 154253 | 4 |
| HLG | 3 | 7374 | 1 |
| WABC | 11 | 22436 | 1 |
| FLOW | 12 | 152618 | -4 |
| Average | 12.25 | 84170 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $154 million in ZUO’s case. Central Garden & Pet Co (NASDAQ:CENT) is the most popular stock in this table. On the other hand Hailiang Education Group Inc. (NASDAQ:HLG) is the least popular one with only 3 bullish hedge fund positions. Zuora, Inc. (NYSE:ZUO) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ZUO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ZUO were disappointed as the stock returned 5.9% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 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.
