Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Nuance Communications Inc. (NASDAQ:NUAN).
Nuance Communications Inc. (NASDAQ:NUAN) was in 39 hedge funds’ portfolios at the end of the fourth quarter of 2019. NUAN has seen an increase in enthusiasm from smart money in recent months. There were 29 hedge funds in our database with NUAN positions at the end of the previous quarter. Our calculations also showed that NUAN isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Larry Robbins of Glenview Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a glance at the new hedge fund action encompassing Nuance Communications Inc. (NASDAQ:NUAN).
How have hedgies been trading Nuance Communications Inc. (NASDAQ:NUAN)?
At Q4’s end, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of 34% from the third quarter of 2019. On the other hand, there were a total of 35 hedge funds with a bullish position in NUAN a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Glenview Capital was the largest shareholder of Nuance Communications Inc. (NASDAQ:NUAN), with a stake worth $244.2 million reported as of the end of September. Trailing Glenview Capital was RGM Capital, which amassed a stake valued at $114.4 million. Park West Asset Management, Lynrock Lake, and Brahman Capital 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 Lynrock Lake allocated the biggest weight to Nuance Communications Inc. (NASDAQ:NUAN), around 10.48% of its 13F portfolio. Brahman Capital is also relatively very bullish on the stock, dishing out 9.35 percent of its 13F equity portfolio to NUAN.
As one would reasonably expect, some big names have been driving this bullishness. Renaissance Technologies assembled the most valuable position in Nuance Communications Inc. (NASDAQ:NUAN). Renaissance Technologies had $40.4 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $30 million position during the quarter. The other funds with new positions in the stock are Dmitry Balyasny’s Balyasny Asset Management, Amy Minella’s Cardinal Capital, and Principal Global Investors’s Columbus Circle Investors.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Nuance Communications Inc. (NASDAQ:NUAN) but similarly valued. These stocks are Rexford Industrial Realty Inc (NYSE:REXR), Cosan Limited (NYSE:CZZ), Radian Group Inc (NYSE:RDN), and Life Storage, Inc. (NYSE:LSI). This group of stocks’ market valuations resemble NUAN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| REXR | 21 | 50480 | 2 |
| CZZ | 12 | 300249 | -3 |
| RDN | 29 | 207932 | 5 |
| LSI | 20 | 217016 | 2 |
| Average | 20.5 | 193919 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $194 million. That figure was $966 million in NUAN’s case. Radian Group Inc (NYSE:RDN) is the most popular stock in this table. On the other hand Cosan Limited (NYSE:CZZ) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Nuance Communications Inc. (NASDAQ:NUAN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still managed to beat the market by 5.5 percentage points. Hedge funds were also right about betting on NUAN as the stock returned -6.8% so far in Q1 (through March 25th) 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
