Were These Hedge Funds Wrong About Dumping Paychex, Inc. (PAYX)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Paychex, Inc. (NASDAQ:PAYX)? The smart money sentiment can provide an answer to this question.

Paychex, Inc. (NASDAQ:PAYX) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 41. PAYX investors should be aware of a decrease in hedge fund sentiment lately. There were 41 hedge funds in our database with PAYX positions at the end of the first quarter. Our calculations also showed that PAYX 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.

In the eyes of most investors, hedge funds are seen as worthless, outdated investment vehicles of years past. While there are greater than 8000 funds trading today, We hone in on the elite of this club, around 850 funds. These money managers administer most of all hedge funds’ total asset base, and by tracking their first-class picks, Insider Monkey has identified various investment strategies that have historically outpaced the broader indices. Insider Monkey’s flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Peter Algert of Algert Global

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. Now we’re going to take a gander at the key hedge fund action surrounding Paychex, Inc. (NASDAQ:PAYX).

How have hedgies been trading Paychex, Inc. (NASDAQ:PAYX)?

Heading into the third quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from the previous quarter. By comparison, 34 hedge funds held shares or bullish call options in PAYX a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Paychex, Inc. (NASDAQ:PAYX) was held by Select Equity Group, which reported holding $389.3 million worth of stock at the end of June. It was followed by D E Shaw with a $79.4 million position. Other investors bullish on the company included Echo Street Capital Management, Arrowstreet Capital, and Millennium Management. In terms of the portfolio weights assigned to each position Lunia Capital allocated the biggest weight to Paychex, Inc. (NASDAQ:PAYX), around 2.58% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, earmarking 2.24 percent of its 13F equity portfolio to PAYX.

Because Paychex, Inc. (NASDAQ:PAYX) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few hedgies that decided to sell off their positions entirely heading into Q3. Intriguingly, Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors dumped the largest investment of all the hedgies followed by Insider Monkey, comprising about $11.7 million in stock, and David Einhorn’s Greenlight Capital was right behind this move, as the fund dropped about $11.6 million worth. These transactions are interesting, as total hedge fund interest dropped by 5 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to Paychex, Inc. (NASDAQ:PAYX). These stocks are IQVIA Holdings, Inc. (NYSE:IQV), The Hershey Company (NYSE:HSY), CRH PLC (NYSE:CRH), ING Groep N.V. (NYSE:ING), TE Connectivity Ltd. (NYSE:TEL), American International Group Inc (NYSE:AIG), and Cadence Design Systems Inc (NASDAQ:CDNS). All of these stocks’ market caps match PAYX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.7 hedge funds with bullish positions and the average amount invested in these stocks was $1376 million. That figure was $877 million in PAYX’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand CRH PLC (NYSE:CRH) is the least popular one with only 7 bullish hedge fund positions. Paychex, Inc. (NASDAQ:PAYX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PAYX is 50.9. 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 gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on PAYX as the stock returned 10.3% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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