Were Hedge Funds Right About Piling Into Change Healthcare Inc. (CHNG)?

In this article we will take a look at whether hedge funds think Change Healthcare Inc. (NASDAQ:CHNG) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Change Healthcare Inc. (NASDAQ:CHNG) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 47 hedge funds’ portfolios at the end of the second quarter of 2020. Our calculations also showed that CHNG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare CHNG to other stocks including NeoGenomics, Inc. (NASDAQ:NEO), bluebird bio Inc (NASDAQ:BLUE), and Enstar Group Ltd. (NASDAQ:ESGR) to get a better sense of its popularity.

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.

David Einhorn of Greenlight Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now let’s analyze the fresh hedge fund action encompassing Change Healthcare Inc. (NASDAQ:CHNG).

How are hedge funds trading Change Healthcare Inc. (NASDAQ:CHNG)?

At the end of June, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in CHNG over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Eminence Capital held the most valuable stake in Change Healthcare Inc. (NASDAQ:CHNG), which was worth $179.1 million at the end of the third quarter. On the second spot was Camber Capital Management which amassed $178.1 million worth of shares. Park West Asset Management, Greenlight Capital, and Hawk Ridge 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 Camber Capital Management allocated the biggest weight to Change Healthcare Inc. (NASDAQ:CHNG), around 10.19% of its 13F portfolio. Simcoe Capital Management is also relatively very bullish on the stock, earmarking 9.09 percent of its 13F equity portfolio to CHNG.

Since Change Healthcare Inc. (NASDAQ:CHNG) has experienced a decline in interest from hedge fund managers, we can see that there were a few fund managers who sold off their positions entirely heading into Q3. At the top of the heap, Amish Mehta’s SQN Investors cut the largest investment of the “upper crust” of funds followed by Insider Monkey, comprising about $42.9 million in stock. James Dinan’s fund, York Capital Management, also said goodbye to its stock, about $16.4 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Change Healthcare Inc. (NASDAQ:CHNG). These stocks are NeoGenomics, Inc. (NASDAQ:NEO), bluebird bio Inc (NASDAQ:BLUE), Enstar Group Ltd. (NASDAQ:ESGR), Rayonier Inc. (NYSE:RYN), UniFirst Corp (NYSE:UNF), Unum Group (NYSE:UNM), and Marriott Vacations Worldwide Corporation (NYSE:VAC). This group of stocks’ market valuations resemble CHNG’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.4 hedge funds with bullish positions and the average amount invested in these stocks was $252 million. That figure was $1112 million in CHNG’s case. bluebird bio Inc (NASDAQ:BLUE) is the most popular stock in this table. On the other hand Enstar Group Ltd. (NASDAQ:ESGR) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Change Healthcare Inc. (NASDAQ:CHNG) is more popular among hedge funds. Our overall hedge fund sentiment score for CHNG is 85. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on CHNG as the stock returned 37.5% since the end of June (through 10/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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