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Did Hedge Funds Make The Right Call On CSG Systems International, Inc. (CSGS) ?

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 CSG Systems International, Inc. (NASDAQ:CSGS) and determine whether hedge funds had an edge regarding this stock.

Is CSG Systems International, Inc. (NASDAQ:CSGS) a buy, sell, or hold? Investors who are in the know were becoming less confident. The number of long hedge fund positions were cut by 4 recently. Our calculations also showed that CSGS 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let’s go over the key hedge fund action regarding CSG Systems International, Inc. (NASDAQ:CSGS).

How are hedge funds trading CSG Systems International, Inc. (NASDAQ:CSGS)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the fourth quarter of 2019. On the other hand, there were a total of 17 hedge funds with a bullish position in CSGS a year ago. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is CSGS A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of CSG Systems International, Inc. (NASDAQ:CSGS), with a stake worth $93.9 million reported as of the end of September. Trailing Renaissance Technologies was Polar Capital, which amassed a stake valued at $31.1 million. Value Holdings LP, Arrowstreet Capital, and GLG Partners 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 Value Holdings LP allocated the biggest weight to CSG Systems International, Inc. (NASDAQ:CSGS), around 6.54% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, setting aside 0.97 percent of its 13F equity portfolio to CSGS.

Since CSG Systems International, Inc. (NASDAQ:CSGS) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there lies a certain “tier” of funds that slashed their full holdings in the first quarter. Interestingly, Dmitry Balyasny’s Balyasny Asset Management dumped the largest investment of the “upper crust” of funds followed by Insider Monkey, totaling close to $1.5 million in stock. Minhua Zhang’s fund, Weld Capital Management, also said goodbye to its stock, about $1.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 4 funds in the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as CSG Systems International, Inc. (NASDAQ:CSGS) but similarly valued. We will take a look at InterDigital, Inc. (NASDAQ:IDCC), The Goodyear Tire & Rubber Company (NASDAQ:GT), Embraer SA (NYSE:ERJ), and Itau CorpBanca (NYSE:ITCB). All of these stocks’ market caps match CSGS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IDCC 23 289642 -4
GT 26 129699 -6
ERJ 16 188996 2
ITCB 1 1270 0
Average 16.5 152402 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $152 million. That figure was $170 million in CSGS’s case. The Goodyear Tire & Rubber Company (NASDAQ:GT) is the most popular stock in this table. On the other hand Itau CorpBanca (NYSE:ITCB) is the least popular one with only 1 bullish hedge fund positions. CSG Systems International, Inc. (NASDAQ:CSGS) 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately CSGS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CSGS were disappointed as the stock returned -1.6% 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.