Should You Avoid FactSet Research Systems Inc. (FDS)?

In this article we will check out the progression of hedge fund sentiment towards FactSet Research Systems Inc. (NYSE:FDS) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

FactSet Research Systems Inc. (NYSE:FDS) was in 21 hedge funds’ portfolios at the end of the first quarter of 2020. FDS has experienced a decrease in support from the world’s most elite money managers in recent months. There were 24 hedge funds in our database with FDS positions at the end of the previous quarter. Our calculations also showed that FDS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s analyze the fresh hedge fund action encompassing FactSet Research Systems Inc. (NYSE:FDS).

What have hedge funds been doing with FactSet Research Systems Inc. (NYSE:FDS)?

At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. On the other hand, there were a total of 18 hedge funds with a bullish position in FDS a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

More specifically, GLG Partners was the largest shareholder of FactSet Research Systems Inc. (NYSE:FDS), with a stake worth $51.3 million reported as of the end of September. Trailing GLG Partners was Echo Street Capital Management, which amassed a stake valued at $33.3 million. Holocene Advisors, Markel Gayner Asset Management, and Balyasny Asset Management 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 Echo Street Capital Management allocated the biggest weight to FactSet Research Systems Inc. (NYSE:FDS), around 0.72% of its 13F portfolio. Markel Gayner Asset Management is also relatively very bullish on the stock, setting aside 0.57 percent of its 13F equity portfolio to FDS.

Since FactSet Research Systems Inc. (NYSE:FDS) has faced falling interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of hedgies who were dropping their entire stakes heading into Q4. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest position of the 750 funds tracked by Insider Monkey, valued at about $20.3 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund said goodbye to about $9.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 3 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to FactSet Research Systems Inc. (NYSE:FDS). These stocks are Synchrony Financial (NYSE:SYF), Moderna, Inc. (NASDAQ:MRNA), Tractor Supply Company (NASDAQ:TSCO), and Teva Pharmaceutical Industries Limited (NYSE:TEVA). This group of stocks’ market caps are closest to FDS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $703 million. That figure was $210 million in FDS’s case. Synchrony Financial (NYSE:SYF) is the most popular stock in this table. On the other hand Moderna, Inc. (NASDAQ:MRNA) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks FactSet Research Systems Inc. (NYSE:FDS) is even less popular than MRNA. Hedge funds dodged a bullet by taking a bearish stance towards FDS. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.2% in 2020 through June 17th but managed to beat the market by 14.8 percentage points. Unfortunately FDS wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); FDS investors were disappointed as the stock returned 15.4% during the second quarter (through June 17th) 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 so far in 2020.

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