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Did Hedge Funds Drop The Ball On Zscaler, Inc. (ZS) ?

The government requires hedge funds and wealthy investors that crossed the $100 million equity holdings threshold are required to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on December 31. We at Insider Monkey have made an extensive database of nearly 750 of those elite funds and prominent investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Zscaler, Inc. (NASDAQ:ZS) based on those filings.

Zscaler, Inc. (NASDAQ:ZS) investors should be aware of a decrease in support from the world’s most elite money managers of late. ZS was in 17 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 28 hedge funds in our database with ZS holdings at the end of the previous quarter. Our calculations also showed that ZS isn’t among the 30 most popular stocks among hedge funds.

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 32 percentage points since May 2014 through March 12, 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 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Philip Hempleman Ardsley Partners

Let’s take a look at the latest hedge fund action regarding Zscaler, Inc. (NASDAQ:ZS).

Hedge fund activity in Zscaler, Inc. (NASDAQ:ZS)

At the end of the fourth quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -39% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in ZS a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

ZS_apr2019

Among these funds, Alkeon Capital Management held the most valuable stake in Zscaler, Inc. (NASDAQ:ZS), which was worth $26.8 million at the end of the third quarter. On the second spot was Driehaus Capital which amassed $21.8 million worth of shares. Moreover, D E Shaw, Renaissance Technologies, and Sandler Capital Management were also bullish on Zscaler, Inc. (NASDAQ:ZS), allocating a large percentage of their portfolios to this stock.

Since Zscaler, Inc. (NASDAQ:ZS) has faced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of fund managers who were dropping their full holdings in the third quarter. Intriguingly, Josh Donfeld and David Rogers’s Castle Hook Partners dumped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, worth close to $23.7 million in stock. Leon Shaulov’s fund, Maplelane Capital, also cut its stock, about $21.4 million worth. These moves are important to note, as total hedge fund interest dropped by 11 funds in the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Zscaler, Inc. (NASDAQ:ZS) but similarly valued. These stocks are Toll Brothers Inc (NYSE:TOL), WPX Energy Inc (NYSE:WPX), EPR Properties (NYSE:EPR), and The Goodyear Tire & Rubber Company (NASDAQ:GT). This group of stocks’ market valuations resemble ZS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TOL 28 444730 -4
WPX 46 727535 -7
EPR 22 155570 9
GT 30 589242 5
Average 31.5 479269 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $479 million. That figure was $92 million in ZS’s case. WPX Energy Inc (NYSE:WPX) is the most popular stock in this table. On the other hand EPR Properties (NYSE:EPR) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Zscaler, Inc. (NASDAQ:ZS) is even less popular than EPR. Hedge funds clearly dropped the ball on ZS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on ZS as the stock returned 63.9% and outperformed the market by an even larger margin.

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

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