Was The Smart Money Right About DocuSign, Inc. (DOCU)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards DocuSign, Inc. (NASDAQ:DOCU) and determine whether hedge funds skillfully traded this stock.

Is DocuSign, Inc. (NASDAQ:DOCU) a sound investment today? Money managers were selling. The number of long hedge fund positions dropped by 7 lately. DocuSign, Inc. (NASDAQ:DOCU) was in 51 hedge funds’ portfolios at the end of September. The all time high for this statistic is 67. Our calculations also showed that DOCU isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings). There were 58 hedge funds in our database with DOCU positions at the end of the second quarter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s take a gander at the recent hedge fund action encompassing DocuSign, Inc. (NASDAQ:DOCU).

Paul Marshall of Marshall Wace

Do Hedge Funds Think DOCU Is A Good Stock To Buy Now?

At Q3’s end, a total of 51 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the second quarter of 2021. By comparison, 62 hedge funds held shares or bullish call options in DOCU a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Tiger Global Management LLC, managed by Chase Coleman, holds the number one position in DocuSign, Inc. (NASDAQ:DOCU). Tiger Global Management LLC has a $1.8814 billion position in the stock, comprising 3.6% of its 13F portfolio. The second most bullish fund manager is Catherine D. Wood of ARK Investment Management, with a $468.9 million position; 1.1% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that are bullish contain Ken Griffin’s Citadel Investment Group, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Christopher Lyle’s SCGE Management. In terms of the portfolio weights assigned to each position Cota Capital allocated the biggest weight to DocuSign, Inc. (NASDAQ:DOCU), around 7.3% of its 13F portfolio. Center Lake Capital is also relatively very bullish on the stock, earmarking 6.07 percent of its 13F equity portfolio to DOCU.

Since DocuSign, Inc. (NASDAQ:DOCU) has faced falling interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedgies that slashed their full holdings by the end of the third quarter. Intriguingly, Brandon Haley’s Holocene Advisors sold off the largest stake of all the hedgies monitored by Insider Monkey, worth an estimated $61.5 million in stock. Daryl Smith’s fund, Kayak Investment Partners, also said goodbye to its stock, about $29.4 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 7 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to DocuSign, Inc. (NASDAQ:DOCU). These stocks are MSCI Inc (NYSE:MSCI), Canadian Imperial Bank of Commerce (NYSE:CM), Humana Inc (NYSE:HUM), Marvell Technology, Inc. (NASDAQ:MRVL), Dollar General Corp. (NYSE:DG), Banco Santander (Brasil) SA (NYSE:BSBR), and Johnson Controls International plc (NYSE:JCI). This group of stocks’ market values resemble DOCU’s market value.

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As you can see these stocks had an average of 37.1 hedge funds with bullish positions and the average amount invested in these stocks was $1184 million. That figure was $4238 million in DOCU’s case. Humana Inc (NYSE:HUM) is the most popular stock in this table. On the other hand Banco Santander (Brasil) SA (NYSE:BSBR) is the least popular one with only 8 bullish hedge fund positions. DocuSign, Inc. (NASDAQ:DOCU) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DOCU is 62.2. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, DOCU wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on DOCU were disappointed as the stock returned -51.1% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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