We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Paycom Software Inc (NYSE:PAYC) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Paycom Software Inc (NYSE:PAYC) investors should be aware of a decrease in support from the world’s most elite money managers of late. Our calculations also showed that PAYC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Ken Griffin of Citadel Investment Group
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. Now let’s take a gander at the fresh hedge fund action surrounding Paycom Software Inc (NYSE:PAYC).
What does smart money think about Paycom Software Inc (NYSE:PAYC)?
At the end of the fourth quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in PAYC over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Paycom Software Inc (NYSE:PAYC) was held by Arrowstreet Capital, which reported holding $70.5 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $61.2 million position. Other investors bullish on the company included Fisher Asset Management, Two Sigma Advisors, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Motley Fool Asset Management allocated the biggest weight to Paycom Software Inc (NYSE:PAYC), around 2.99% of its 13F portfolio. Navellier & Associates is also relatively very bullish on the stock, dishing out 2.77 percent of its 13F equity portfolio to PAYC.
Since Paycom Software Inc (NYSE:PAYC) has witnessed bearish sentiment from hedge fund managers, we can see that there exists a select few hedgies that slashed their positions entirely in the third quarter. Intriguingly, Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors sold off the largest position of the 750 funds tracked by Insider Monkey, comprising about $12.6 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dumped about $10.7 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 6 funds in the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Paycom Software Inc (NYSE:PAYC) but similarly valued. We will take a look at Genuine Parts Company (NYSE:GPC), iQIYI, Inc. (NASDAQ:IQ), Liberty Media Corporation (NASDAQ:LSXMA), and Live Nation Entertainment, Inc. (NYSE:LYV). This group of stocks’ market caps are similar to PAYC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GPC | 21 | 271270 | 0 |
| IQ | 18 | 1133592 | -5 |
| LSXMA | 50 | 1786071 | 9 |
| LYV | 44 | 1666010 | 0 |
| Average | 33.25 | 1214236 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $1214 million. That figure was $386 million in PAYC’s case. Liberty Media Corporation (NASDAQ:LSXMA) is the most popular stock in this table. On the other hand iQIYI, Inc. (NASDAQ:IQ) is the least popular one with only 18 bullish hedge fund positions. Paycom Software Inc (NYSE:PAYC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 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 beat the market by 3.2 percentage points. Unfortunately PAYC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PAYC investors were disappointed as the stock returned -25.9% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
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.
