“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Endava plc (NYSE:DAVA) and see how it was affected.
Is Endava plc (NYSE:DAVA) undervalued? Investors who are in the know are getting less bullish. The number of long hedge fund positions dropped by 3 in recent months. Our calculations also showed that DAVA 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.
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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Richard Driehaus of Driehaus Capital
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now let’s take a look at the latest hedge fund action encompassing Endava plc (NYSE:DAVA).
Hedge fund activity in Endava plc (NYSE:DAVA)
Heading into the fourth quarter of 2019, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -38% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards DAVA over the last 17 quarters. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
The largest stake in Endava plc (NYSE:DAVA) was held by Driehaus Capital, which reported holding $33.5 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $5.4 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Driehaus Capital allocated the biggest weight to Endava plc (NYSE:DAVA), around 1.09% of its 13F portfolio. Millennium Management is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to DAVA.
Judging by the fact that Endava plc (NYSE:DAVA) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there were a few hedge funds who were dropping their positions entirely in the third quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the biggest stake of the “upper crust” of funds followed by Insider Monkey, valued at about $0.8 million in stock, and Matthew Halbower’s Pentwater Capital Management was right behind this move, as the fund cut about $0.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds in the third quarter.
Let’s check out hedge fund activity in other stocks similar to Endava plc (NYSE:DAVA). We will take a look at Tower Semiconductor Ltd. (NASDAQ:TSEM), BEST Inc. (NYSE:BEST), DiamondRock Hospitality Company (NYSE:DRH), and Commercial Metals Company (NYSE:CMC). This group of stocks’ market caps match DAVA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TSEM | 13 | 289098 | 2 |
| BEST | 14 | 46733 | 1 |
| DRH | 16 | 116483 | -1 |
| CMC | 17 | 233187 | 0 |
| Average | 15 | 171375 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $171 million. That figure was $44 million in DAVA’s case. Commercial Metals Company (NYSE:CMC) is the most popular stock in this table. On the other hand Tower Semiconductor Ltd. (NASDAQ:TSEM) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Endava plc (NYSE:DAVA) is even less popular than TSEM. Hedge funds clearly dropped the ball on DAVA 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on DAVA as the stock returned 25.8% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
