Were Hedge Funds Right About Nuance Communications (NUAN)?

In this article you are going to find out whether hedge funds think Nuance Communications Inc. (NASDAQ:NUAN) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Nuance Communications Inc. (NASDAQ:NUAN) investors should pay attention to an increase in support from the world’s most elite money managers of late. Nuance Communications Inc. (NASDAQ:NUAN) was in 72 hedge funds’ portfolios at the end of June. The all time high for this statistic was previously 60. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 57 hedge funds in our database with NUAN holdings at the end of March. Our calculations also showed that NUAN isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Matthew Halbower of Pentwater Capital

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 let’s take a look at the recent hedge fund action surrounding Nuance Communications Inc. (NASDAQ:NUAN).

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

At Q2’s end, a total of 72 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 26% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NUAN over the last 24 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Coatue Management held the most valuable stake in Nuance Communications Inc. (NASDAQ:NUAN), which was worth $732.4 million at the end of the second quarter. On the second spot was Pentwater Capital Management which amassed $665.8 million worth of shares. Millennium Management, D E Shaw, 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 Sand Grove Capital Partners allocated the biggest weight to Nuance Communications Inc. (NASDAQ:NUAN), around 13% of its 13F portfolio. Litespeed Management is also relatively very bullish on the stock, designating 9.23 percent of its 13F equity portfolio to NUAN.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Pentwater Capital Management, managed by Matthew Halbower, established the largest position in Nuance Communications Inc. (NASDAQ:NUAN). Pentwater Capital Management had $665.8 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $252.4 million position during the quarter. The other funds with brand new NUAN positions are Simon Sadler’s Segantii Capital, Sander Gerber’s Hudson Bay Capital Management, and Robert Emil Zoellner’s Alpine Associates.

Let’s check out 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 IDEX Corporation (NYSE:IEX), Entegris Inc (NASDAQ:ENTG), VICI Properties Inc. (NYSE:VICI), Dynatrace, Inc. (NYSE:DT), Cardinal Health, Inc. (NYSE:CAH), PTC Inc (NASDAQ:PTC), and Carlyle Group Inc (NASDAQ:CG). This group of stocks’ market values are similar to NUAN’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.3 hedge funds with bullish positions and the average amount invested in these stocks was $1201 million. That figure was $5576 million in NUAN’s case. Dynatrace, Inc. (NYSE:DT) is the most popular stock in this table. On the other hand Carlyle Group Inc (NASDAQ:CG) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Nuance Communications Inc. (NASDAQ:NUAN) is more popular among hedge funds. Our overall hedge fund sentiment score for NUAN is 90. 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 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 still beat the market by 2.3 percentage points. Unfortunately NUAN wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on NUAN were disappointed as the stock returned 1.1% since the end of the second quarter (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 most of these stocks already outperformed the market since 2019.

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

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