How Did Hedge Funds’ Zscaler, Inc. (ZS) Bets Fare?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 867 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of September 30th, when the S&P 500 Index was trading around the 4300 level. Since then investors decided to bet on the economic recovery and a stock market rebound even though we experienced a temporary correction in January. In this article you are going to find out whether hedge funds thought Zscaler, Inc. (NASDAQ:ZS) was a good investment heading into the fourth quarter and how the stock traded in comparison to the top hedge fund picks.

Zscaler, Inc. (NASDAQ:ZS) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 38 hedge funds’ portfolios at the end of September. Our calculations also showed that ZS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Centene Corporation (NYSE:CNC), CRH PLC (NYSE:CRH), and General Mills, Inc. (NYSE:GIS) to gather more data points.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 review the key hedge fund action encompassing Zscaler, Inc. (NASDAQ:ZS).

Donald Sussman of Paloma Partners

Do Hedge Funds Think ZS Is A Good Stock To Buy Now?

At the end of the third quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2021. On the other hand, there were a total of 26 hedge funds with a bullish position in ZS a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Arrowstreet Capital was the largest shareholder of Zscaler, Inc. (NASDAQ:ZS), with a stake worth $464.9 million reported as of the end of September. Trailing Arrowstreet Capital was Two Sigma Advisors, which amassed a stake valued at $280.3 million. D E Shaw, Citadel Investment Group, and Citadel Investment Group 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 Cota Capital allocated the biggest weight to Zscaler, Inc. (NASDAQ:ZS), around 8.8% of its 13F portfolio. Montanaro Asset Management is also relatively very bullish on the stock, dishing out 3.43 percent of its 13F equity portfolio to ZS.

Judging by the fact that Zscaler, Inc. (NASDAQ:ZS) has faced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of money managers that decided to sell off their full holdings in the third quarter. At the top of the heap, Steve Cohen’s Point72 Asset Management said goodbye to the largest position of all the hedgies watched by Insider Monkey, totaling about $27.8 million in stock, and Ray Dalio’s Bridgewater Associates was right behind this move, as the fund dumped about $9.9 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Zscaler, Inc. (NASDAQ:ZS). We will take a look at Centene Corporation (NYSE:CNC), CRH PLC (NYSE:CRH), General Mills, Inc. (NYSE:GIS), SBA Communications Corporation (NASDAQ:SBAC), Yum! Brands, Inc. (NYSE:YUM), Cloudflare, Inc. (NYSE:NET), and Mizuho Financial Group Inc. (NYSE:MFG). This group of stocks’ market caps match ZS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.3 hedge funds with bullish positions and the average amount invested in these stocks was $981 million. That figure was $1624 million in ZS’s case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand Mizuho Financial Group Inc. (NYSE:MFG) is the least popular one with only 6 bullish hedge fund positions. Zscaler, Inc. (NASDAQ:ZS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ZS is 71.4. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, ZS wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on ZS were disappointed as the stock returned -1.9% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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