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

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 900 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about DocuSign, Inc. (NASDAQ:DOCU) in this article.

Is DocuSign, Inc. (NASDAQ:DOCU) a first-rate investment today? Investors who are in the know were taking a bearish view. The number of bullish hedge fund bets decreased by 2 recently. DocuSign, Inc. (NASDAQ:DOCU) was in 58 hedge funds’ portfolios at the end of June. 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 Q2 rankings). There were 60 hedge funds in our database with DOCU holdings at the end of March.

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 79 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.

Cathie Wood of ARK Investment Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we’re going to check out the latest hedge fund action surrounding DocuSign, Inc. (NASDAQ:DOCU).

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

At second quarter’s end, a total of 58 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DOCU over the last 24 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Among these funds, Tiger Global Management LLC held the most valuable stake in DocuSign, Inc. (NASDAQ:DOCU), which was worth $2035.3 million at the end of the second quarter. On the second spot was ARK Investment Management which amassed $784.8 million worth of shares. Arrowstreet Capital, SCGE Management, and Citadel Investment Group 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 Cota Capital allocated the biggest weight to DocuSign, Inc. (NASDAQ:DOCU), around 7.74% of its 13F portfolio. Center Lake Capital is also relatively very bullish on the stock, designating 6.03 percent of its 13F equity portfolio to DOCU.

Judging by the fact that DocuSign, Inc. (NASDAQ:DOCU) has faced declining sentiment from the aggregate hedge fund industry, we can see that there were a few fund managers that elected to cut their positions entirely heading into Q3. At the top of the heap, Philippe Laffont’s Coatue Management said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, comprising about $46.1 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also sold off its stock, about $39.7 million worth. These moves are important to note, as total hedge fund interest fell by 2 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as DocuSign, Inc. (NASDAQ:DOCU) but similarly valued. These stocks are Freeport-McMoRan Inc. (NYSE:FCX), Ambev SA (NYSE:ABEV), BioNTech SE (NASDAQ:BNTX), Aon plc (NYSE:AON), IDEXX Laboratories, Inc. (NASDAQ:IDXX), General Dynamics Corporation (NYSE:GD), and Takeda Pharmaceutical Company Limited (NYSE:TAK). This group of stocks’ market values are similar to DOCU’s market value.

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As you can see these stocks had an average of 39.6 hedge funds with bullish positions and the average amount invested in these stocks was $3320 million. That figure was $4611 million in DOCU’s case. Freeport-McMoRan Inc. (NYSE:FCX) is the most popular stock in this table. On the other hand Ambev SA (NYSE:ABEV) is the least popular one with only 18 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 63.5. 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 26.3% in 2021 through October 29th and beat the market again by 2.3 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 -0.5% since the end of June (through 10/29) 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 many of these stocks already outperformed the market since 2019.

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