Did Hedge Funds Make The Right Call On Cognizant Technology Solutions Corp (CTSH) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Cognizant Technology Solutions Corp (NASDAQ:CTSH) and determine whether hedge funds skillfully traded this stock.

Is Cognizant Technology Solutions Corp (NASDAQ:CTSH) a buy, sell, or hold? Investors who are in the know were becoming less hopeful. The number of long hedge fund positions retreated by 5 in recent months. Our calculations also showed that CTSH 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).

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

If you’d ask most investors, hedge funds are perceived as worthless, old investment vehicles of the past. While there are more than 8000 funds with their doors open today, Our researchers look at the moguls of this group, around 850 funds. These money managers shepherd bulk of the smart money’s total asset base, and by tracking their inimitable picks, Insider Monkey has spotted several investment strategies that have historically beaten the broader indices. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .


Lee Ainslie of Maverick Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. With all of this in mind let’s analyze the recent hedge fund action surrounding Cognizant Technology Solutions Corp (NASDAQ:CTSH).

How are hedge funds trading Cognizant Technology Solutions Corp (NASDAQ:CTSH)?

Heading into the second quarter of 2020, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CTSH over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Cognizant Technology Solutions Corp (NASDAQ:CTSH) was held by Generation Investment Management, which reported holding $744 million worth of stock at the end of September. It was followed by Pzena Investment Management with a $412.3 million position. Other investors bullish on the company included Yacktman Asset Management, Citadel Investment Group, and Diamond Hill Capital. In terms of the portfolio weights assigned to each position Broad Peak Investment Holdings allocated the biggest weight to Cognizant Technology Solutions Corp (NASDAQ:CTSH), around 11.09% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, setting aside 5.28 percent of its 13F equity portfolio to CTSH.

Since Cognizant Technology Solutions Corp (NASDAQ:CTSH) has witnessed declining sentiment from hedge fund managers, we can see that there was a specific group of money managers that slashed their positions entirely heading into Q4. Interestingly, D. E. Shaw’s D E Shaw said goodbye to the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $20 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also cut its stock, about $3.3 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 5 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Cognizant Technology Solutions Corp (NASDAQ:CTSH). These stocks are The Travelers Companies, Inc. (NYSE:TRV), DuPont de Nemours Inc (NYSE:DD), Hormel Foods Corporation (NYSE:HRL), and HP Inc. (NYSE:HPQ). This group of stocks’ market valuations are similar to CTSH’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TRV 29 481539 -10
DD 54 2411525 -14
HRL 28 276267 5
HPQ 43 2180945 -6
Average 38.5 1337569 -6.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.5 hedge funds with bullish positions and the average amount invested in these stocks was $1338 million. That figure was $2225 million in CTSH’s case. DuPont de Nemours Inc (NYSE:DD) is the most popular stock in this table. On the other hand Hormel Foods Corporation (NYSE:HRL) is the least popular one with only 28 bullish hedge fund positions. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on CTSH, though not to the same extent, as the stock returned 22.8% during the second quarter and outperformed the market.

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