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Did Hedge Funds Drop The Ball On NIC Inc. (EGOV)?

Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 24.4% compared to 20.4%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.

Is NIC Inc. (NASDAQ:EGOV) the right investment to pursue these days? Hedge funds are taking a bearish view. The number of bullish hedge fund positions retreated by 1 in recent months. Our calculations also showed that EGOV isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

EGOV_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a gander at the fresh hedge fund action encompassing NIC Inc. (NASDAQ:EGOV).

Hedge fund activity in NIC Inc. (NASDAQ:EGOV)

At Q2’s end, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the first quarter of 2019. On the other hand, there were a total of 15 hedge funds with a bullish position in EGOV 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.

John Overdeck of Two Sigma

Among these funds, Renaissance Technologies held the most valuable stake in NIC Inc. (NASDAQ:EGOV), which was worth $22.3 million at the end of the second quarter. On the second spot was D E Shaw which amassed $20.5 million worth of shares. Moreover, Arrowstreet Capital, GLG Partners, and Two Sigma Advisors were also bullish on NIC Inc. (NASDAQ:EGOV), allocating a large percentage of their portfolios to this stock.

Seeing as NIC Inc. (NASDAQ:EGOV) has witnessed a decline in interest from the smart money, we can see that there exists a select few hedge funds that elected to cut their entire stakes by the end of the second quarter. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the biggest position of the “upper crust” of funds monitored by Insider Monkey, valued at close to $3.3 million in stock, and Peter Algert and Kevin Coldiron’s Algert Coldiron Investors was right behind this move, as the fund sold off about $1.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds by the end of the second quarter.

Let’s check out hedge fund activity in other stocks similar to NIC Inc. (NASDAQ:EGOV). These stocks are KEMET Corporation (NYSE:KEM), Meta Financial Group Inc. (NASDAQ:CASH), Office Depot Inc (NASDAQ:ODP), and Heritage Financial Corporation (NASDAQ:HFWA). This group of stocks’ market caps match EGOV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KEM 18 146880 -1
CASH 12 123017 0
ODP 20 62932 -2
HFWA 9 46205 2
Average 14.75 94759 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $90 million in EGOV’s case. Office Depot Inc (NASDAQ:ODP) is the most popular stock in this table. On the other hand Heritage Financial Corporation (NASDAQ:HFWA) is the least popular one with only 9 bullish hedge fund positions. NIC Inc. (NASDAQ:EGOV) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on EGOV as the stock returned 29.2% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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