“Value has performed relatively poorly since the 2017 shift, but we believe challenges to the S&P 500’s dominance are mounting and resulting active opportunities away from the index are growing. At some point, this fault line will break, likely on the back of rising rates, and all investors will be reminded that the best time to diversify away from the winners is when it is most painful. The bargain of capturing long-term value may be short-term pain, but enough is eventually enough and it comes time to harvest the benefits.,” said Clearbridge Investments in its market commentary. We aren’t sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on Nuance Communications Inc. (NASDAQ:NUAN) in order to identify whether reputable and successful top money managers continue to believe in its potential.
Nuance Communications Inc. (NASDAQ:NUAN) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 20 hedge funds’ portfolios at the end of the third quarter of 2018. 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 Quanta Services Inc (NYSE:PWR), SINA Corp (NASDAQ:SINA), and Enbridge Energy Partners, L.P. (NYSE:EEP) to gather more data points.
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 gander at the key hedge fund action regarding Nuance Communications Inc. (NASDAQ:NUAN).
How are hedge funds trading Nuance Communications Inc. (NASDAQ:NUAN)?
At Q3’s end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, representing no change from one quarter earlier. By comparison, 39 hedge funds held shares or bullish call options in NUAN heading into this year. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
More specifically, Glenview Capital was the largest shareholder of Nuance Communications Inc. (NASDAQ:NUAN), with a stake worth $171.6 million reported as of the end of September. Trailing Glenview Capital was RGM Capital, which amassed a stake valued at $67.4 million. 12th Street Asset Management, GMT Capital, and Fisher Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Nuance Communications Inc. (NASDAQ:NUAN) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of funds that elected to cut their full holdings last quarter. It’s worth mentioning that Christopher Lord’s Criterion Capital dropped the largest investment of the 700 funds watched by Insider Monkey, valued at close to $89.4 million in stock, and Bart Baum’s Ionic Capital Management was right behind this move, as the fund dumped about $5.9 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Nuance Communications Inc. (NASDAQ:NUAN) but similarly valued. We will take a look at Quanta Services Inc (NYSE:PWR), SINA Corp (NASDAQ:SINA), Enbridge Energy Partners, L.P. (NYSE:EEP), and Littelfuse, Inc. (NASDAQ:LFUS). This group of stocks’ market caps are similar to NUAN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PWR | 34 | 508552 | 0 |
| SINA | 24 | 769904 | -4 |
| EEP | 3 | 7459 | 0 |
| LFUS | 22 | 258266 | 2 |
| Average | 20.75 | 386045 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $386 million. That figure was $398 million in NUAN’s case. Quanta Services Inc (NYSE:PWR) is the most popular stock in this table. On the other hand Enbridge Energy Partners, L.P. (NYSE:EEP) is the least popular one with only 3 bullish hedge fund positions. Nuance Communications Inc. (NASDAQ:NUAN) 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 PWR might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
