You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund investors like Carl Icahn and George Soros hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.
Is Paychex, Inc. (NASDAQ:PAYX) a buy right now? The smart money is becoming hopeful. The number of long hedge fund bets increased by 6 lately. Our calculations also showed that PAYX isn’t among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
We’re going to take a look at the new hedge fund action encompassing Paychex, Inc. (NASDAQ:PAYX).
How have hedgies been trading Paychex, Inc. (NASDAQ:PAYX)?
At Q3’s end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in PAYX over the last 13 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Paychex, Inc. (NASDAQ:PAYX) was held by Select Equity Group, which reported holding $510.3 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $251.7 million position. Other investors bullish on the company included Millennium Management, GLG Partners, and Gotham Asset Management.
Now, some big names were leading the bulls’ herd. Millennium Management, managed by Israel Englander, assembled the most valuable call position in Paychex, Inc. (NASDAQ:PAYX). Millennium Management had $25.8 million invested in the company at the end of the quarter. Matthew Tewksbury’s Stevens Capital Management also initiated a $14 million position during the quarter. The other funds with brand new PAYX positions are Jim Simons’s Renaissance Technologies, Bruce Kovner’s Caxton Associates LP, and Alec Litowitz and Ross Laser’s Magnetar Capital.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Paychex, Inc. (NASDAQ:PAYX) but similarly valued. We will take a look at PPG Industries, Inc. (NYSE:PPG), DXC Technology Company (NYSE:DXC), IQVIA Holdings, Inc. (NYSE:IQV), and Discover Financial Services (NYSE:DFS). All of these stocks’ market caps are similar to PAYX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PPG | 22 | 655098 | 3 |
| DXC | 50 | 2485422 | -6 |
| IQV | 48 | 4905001 | 2 |
| DFS | 32 | 1061634 | 0 |
| Average | 38 | 2276789 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $2.28 billion. That figure was $1.08 billion in PAYX’s case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand PPG Industries, Inc. (NYSE:PPG) is the least popular one with only 22 bullish hedge fund positions. Paychex, Inc. (NASDAQ:PAYX) 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. In this regard DXC might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
