Were These Hedge Funds Right About Selling Fair Isaac Corporation (FICO)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Fair Isaac Corporation (NYSE:FICO).

Is Fair Isaac Corporation (NYSE:FICO) an exceptional investment right now? The smart money was taking a pessimistic view. The number of bullish hedge fund positions were cut by 5 in recent months. Fair Isaac Corporation (NYSE:FICO) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 45. Our calculations also showed that FICO 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Ray Dalio of Bridgewater Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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. With all of this in mind we’re going to take a glance at the recent hedge fund action encompassing Fair Isaac Corporation (NYSE:FICO).

How have hedgies been trading Fair Isaac Corporation (NYSE:FICO)?

At the end of June, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FICO over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Melvin Capital Management was the largest shareholder of Fair Isaac Corporation (NYSE:FICO), with a stake worth $441.5 million reported as of the end of June. Trailing Melvin Capital Management was Ako Capital, which amassed a stake valued at $154.3 million. Valley Forge Capital, Broad Bay Capital, and Newbrook Capital Advisors 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 Valley Forge Capital allocated the biggest weight to Fair Isaac Corporation (NYSE:FICO), around 17.29% of its 13F portfolio. Broad Bay Capital is also relatively very bullish on the stock, designating 12.89 percent of its 13F equity portfolio to FICO.

Because Fair Isaac Corporation (NYSE:FICO) has faced bearish sentiment from the smart money, logic holds that there were a few fund managers that elected to cut their entire stakes in the second quarter. Interestingly, Guy Shahar’s DSAM Partners dropped the largest position of all the hedgies monitored by Insider Monkey, totaling about $18.1 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund said goodbye to about $13.9 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 5 funds in the second quarter.

Let’s now review hedge fund activity in other stocks similar to Fair Isaac Corporation (NYSE:FICO). We will take a look at GDS Holdings Limited (NASDAQ:GDS), Brookfield Infrastructure Partners L.P. (NYSE:BIP), The J.M. Smucker Company (NYSE:SJM), W.P. Carey Inc. (NYSE:WPC), LINE Corporation (NYSE:LN), Catalent Inc (NYSE:CTLT), and NVR, Inc. (NYSE:NVR). This group of stocks’ market valuations are closest to FICO’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.3 hedge funds with bullish positions and the average amount invested in these stocks was $658 million. That figure was $1223 million in FICO’s case. GDS Holdings Limited (NASDAQ:GDS) is the most popular stock in this table. On the other hand LINE Corporation (NYSE:LN) is the least popular one with only 8 bullish hedge fund positions. Fair Isaac Corporation (NYSE:FICO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FICO is 64. 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 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 gained 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately FICO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FICO were disappointed as the stock returned -6.4% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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