How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding RingCentral Inc (NYSE:RNG) and determine whether hedge funds had an edge regarding this stock.
RingCentral Inc (NYSE:RNG) was in 62 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 67. RNG has seen a decrease in enthusiasm from smart money recently. There were 67 hedge funds in our database with RNG holdings at the end of March. Our calculations also showed that RNG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: 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’ 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
Chase Coleman of Tiger Global
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s take a glance at the key hedge fund action encompassing RingCentral Inc (NYSE:RNG).
What have hedge funds been doing with RingCentral Inc (NYSE:RNG)?
At second quarter’s end, a total of 62 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. By comparison, 45 hedge funds held shares or bullish call options in RNG a year ago. 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 RingCentral Inc (NYSE:RNG) was held by Alkeon Capital Management, which reported holding $1041.7 million worth of stock at the end of September. It was followed by Tiger Global Management LLC with a $948 million position. Other investors bullish on the company included SCGE Management, Zevenbergen Capital Investments, and SQN Investors. In terms of the portfolio weights assigned to each position SQN Investors allocated the biggest weight to RingCentral Inc (NYSE:RNG), around 9.87% of its 13F portfolio. Cota Capital is also relatively very bullish on the stock, designating 8.71 percent of its 13F equity portfolio to RNG.
Due to the fact that RingCentral Inc (NYSE:RNG) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of fund managers who sold off their full holdings last quarter. At the top of the heap, Philippe Laffont’s Coatue Management cut the largest investment of the 750 funds watched by Insider Monkey, valued at close to $110.7 million in stock, and Brian Ashford-Russell and Tim Woolley’s Polar Capital was right behind this move, as the fund sold off about $71.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 5 funds last quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as RingCentral Inc (NYSE:RNG) but similarly valued. We will take a look at PPG Industries, Inc. (NYSE:PPG), ANSYS, Inc. (NASDAQ:ANSS), Okta, Inc. (NASDAQ:OKTA), HP Inc. (NYSE:HPQ), McKesson Corporation (NYSE:MCK), Public Service Enterprise Group Incorporated (NYSE:PEG), and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN). This group of stocks’ market values match RNG’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PPG | 36 | 261423 | 1 |
| ANSS | 40 | 1322878 | 9 |
| OKTA | 60 | 1990664 | 12 |
| HPQ | 35 | 1106876 | -8 |
| MCK | 61 | 1958790 | -2 |
| PEG | 31 | 649382 | -3 |
| ALXN | 57 | 3577628 | 1 |
| Average | 45.7 | 1552520 | 1.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 45.7 hedge funds with bullish positions and the average amount invested in these stocks was $1553 million. That figure was $3647 million in RNG’s case. McKesson Corporation (NYSE:MCK) is the most popular stock in this table. On the other hand Public Service Enterprise Group Incorporated (NYSE:PEG) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks RingCentral Inc (NYSE:RNG) is more popular among hedge funds. Our overall hedge fund sentiment score for RNG is 77.8. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 28.2% in 2020 through August 24th and still beat the market by 20.6 percentage points. Unfortunately RNG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RNG were disappointed as the stock returned 0% since the end of the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
