Were Hedge Funds Right About Piling Into DocuSign, Inc. (DOCU)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards DocuSign, Inc. (NASDAQ:DOCU) at the end of the first quarter and determine whether the smart money was really smart about this stock.

DocuSign, Inc. (NASDAQ:DOCU) shareholders have witnessed an increase in support from the world’s most elite money managers lately. DOCU was in 47 hedge funds’ portfolios at the end of the first quarter of 2020. There were 33 hedge funds in our database with DOCU positions at the end of the previous quarter. Our calculations also showed that DOCU 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Philippe Laffont of Coatue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the new hedge fund action regarding DocuSign, Inc. (NASDAQ:DOCU).

How are hedge funds trading DocuSign, Inc. (NASDAQ:DOCU)?

At Q1’s end, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 42% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards DOCU over the last 18 quarters. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, D. E. Shaw’s D E Shaw has the largest position in DocuSign, Inc. (NASDAQ:DOCU), worth close to $368 million, corresponding to 0.6% of its total 13F portfolio. On D E Shaw’s heels is Whale Rock Capital Management, led by Alex Sacerdote, holding a $170.9 million position; the fund has 2.3% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism encompass David Goel and Paul Ferri’s Matrix Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and Josh Resnick’s Jericho Capital Asset Management. In terms of the portfolio weights assigned to each position Cowbird Capital allocated the biggest weight to DocuSign, Inc. (NASDAQ:DOCU), around 20.2% of its 13F portfolio. Cota Capital is also relatively very bullish on the stock, earmarking 13.39 percent of its 13F equity portfolio to DOCU.

As aggregate interest increased, specific money managers were leading the bulls’ herd. Whale Rock Capital Management, managed by Alex Sacerdote, assembled the most outsized position in DocuSign, Inc. (NASDAQ:DOCU). Whale Rock Capital Management had $170.9 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $16.4 million investment in the stock during the quarter. The other funds with brand new DOCU positions are Andrew Sandler’s Sandler Capital Management, Larry Chen and Terry Zhang’s Tairen Capital, and Greg Eisner’s Engineers Gate Manager.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as DocuSign, Inc. (NASDAQ:DOCU) but similarly valued. We will take a look at Mettler-Toledo International Inc. (NYSE:MTD), LyondellBasell Industries NV (NYSE:LYB), AMETEK, Inc. (NYSE:AME), and Royal Bank of Scotland Group plc (NYSE:RBS). This group of stocks’ market valuations are similar to DOCU’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $436 million. That figure was $1083 million in DOCU’s case. LyondellBasell Industries NV (NYSE:LYB) is the most popular stock in this table. On the other hand Royal Bank of Scotland Group plc (NYSE:RBS) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks DocuSign, Inc. (NASDAQ:DOCU) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on DOCU as the stock returned 86.4% in Q2 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.