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Did Hedge Funds Make The Right Call On ACI Worldwide Inc (ACIW) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtACI Worldwide Inc (NASDAQ:ACIW) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is ACI Worldwide Inc (NASDAQ:ACIW) going to take off soon? Money managers were betting on the stock. The number of bullish hedge fund bets rose by 4 recently. Our calculations also showed that ACIW isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). ACIW was in 24 hedge funds’ portfolios at the end of March. There were 20 hedge funds in our database with ACIW positions at the end of the previous quarter.

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

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 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 58 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.

Jeff Smith

Jeffrey Smith of Starboard Value LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to check out the fresh hedge fund action surrounding ACI Worldwide Inc (NASDAQ:ACIW).

Hedge fund activity in ACI Worldwide Inc (NASDAQ:ACIW)

Heading into the second quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the previous quarter. On the other hand, there were a total of 23 hedge funds with a bullish position in ACIW a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in ACI Worldwide Inc (NASDAQ:ACIW) was held by Cardinal Capital, which reported holding $112.7 million worth of stock at the end of September. It was followed by P2 Capital Partners with a $45.8 million position. Other investors bullish on the company included Starboard Value LP, Wallace R. Weitz & Co., and Shannon River Fund Management. In terms of the portfolio weights assigned to each position Cardinal Capital allocated the biggest weight to ACI Worldwide Inc (NASDAQ:ACIW), around 5.54% of its 13F portfolio. P2 Capital Partners is also relatively very bullish on the stock, earmarking 5.47 percent of its 13F equity portfolio to ACIW.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Starboard Value LP, managed by Jeffrey Smith, established the most outsized position in ACI Worldwide Inc (NASDAQ:ACIW). Starboard Value LP had $34.8 million invested in the company at the end of the quarter. Spencer M. Waxman’s Shannon River Fund Management also made a $18.8 million investment in the stock during the quarter. The following funds were also among the new ACIW investors: Benjamin A. Smith’s Laurion Capital Management, Dmitry Balyasny’s Balyasny Asset Management, and Greg Eisner’s Engineers Gate Manager.

Let’s now take a look at hedge fund activity in other stocks similar to ACI Worldwide Inc (NASDAQ:ACIW). These stocks are Novanta Inc. (NASDAQ:NOVT), PTC Therapeutics, Inc. (NASDAQ:PTCT), Acacia Communications, Inc. (NASDAQ:ACIA), and Omnicell, Inc. (NASDAQ:OMCL). This group of stocks’ market caps match ACIW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NOVT 10 20986 -4
PTCT 28 378361 -6
ACIA 22 693548 -9
OMCL 17 54589 4
Average 19.25 286871 -3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $287 million. That figure was $272 million in ACIW’s case. PTC Therapeutics, Inc. (NASDAQ:PTCT) is the most popular stock in this table. On the other hand Novanta Inc. (NASDAQ:NOVT) is the least popular one with only 10 bullish hedge fund positions. ACI Worldwide Inc (NASDAQ:ACIW) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ACIW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ACIW were disappointed as the stock returned 11.8% during the same time period 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.

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