“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 Open Text Corporation (NASDAQ:OTEX) and see how it was affected.
Open Text Corporation (NASDAQ:OTEX) was in 14 hedge funds’ portfolios at the end of September. OTEX investors should pay attention to a decrease in activity from the world’s largest hedge funds in recent months. There were 16 hedge funds in our database with OTEX positions at the end of the previous quarter. Our calculations also showed that OTEX 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.
Clifton S. Robbins of Blue Harbour Group
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s review the new hedge fund action encompassing Open Text Corporation (NASDAQ:OTEX).
Hedge fund activity in Open Text Corporation (NASDAQ:OTEX)
At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from the second quarter of 2019. By comparison, 19 hedge funds held shares or bullish call options in OTEX a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Among these funds, Blue Harbour Group held the most valuable stake in Open Text Corporation (NASDAQ:OTEX), which was worth $175.7 million at the end of the third quarter. On the second spot was Praesidium Investment Management which amassed $150 million worth of shares. GLG Partners, Renaissance Technologies, and Arrowstreet Capital 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 Blue Harbour Group allocated the biggest weight to Open Text Corporation (NASDAQ:OTEX), around 10.3% of its 13F portfolio. Praesidium Investment Management is also relatively very bullish on the stock, earmarking 9.84 percent of its 13F equity portfolio to OTEX.
Due to the fact that Open Text Corporation (NASDAQ:OTEX) has faced a decline in interest from the smart money, it’s easy to see that there is a sect of money managers who were dropping their positions entirely last quarter. Interestingly, Donald Sussman’s Paloma Partners dumped the biggest position of the “upper crust” of funds followed by Insider Monkey, worth about $4.7 million in stock. Minhua Zhang’s fund, Weld Capital Management, also dumped its stock, about $1.4 million worth. These transactions are important to note, as total hedge fund interest was cut by 2 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Open Text Corporation (NASDAQ:OTEX). We will take a look at Pinnacle West Capital Corporation (NYSE:PNW), DocuSign, Inc. (NASDAQ:DOCU), AXA Equitable Holdings, Inc. (NYSE:EQH), and The AES Corporation (NYSE:AES). This group of stocks’ market valuations are closest to OTEX’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PNW | 24 | 865074 | 1 |
| DOCU | 26 | 673817 | 0 |
| EQH | 21 | 1062610 | -11 |
| AES | 24 | 441027 | -3 |
| Average | 23.75 | 760632 | -3.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $761 million. That figure was $610 million in OTEX’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand AXA Equitable Holdings, Inc. (NYSE:EQH) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Open Text Corporation (NASDAQ:OTEX) is even less popular than EQH. 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 OTEX, though not to the same extent, as the stock returned 7.2% during the fourth quarter (through 11/30) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
