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Did Hedge Funds Make The Right Call On Guidewire Software Inc (GWRE) ?

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 Guidewire Software Inc (NYSE:GWRE) and determine whether hedge funds skillfully traded this stock.

Is Guidewire Software Inc (NYSE:GWRE) going to take off soon? Prominent investors were becoming more confident. The number of bullish hedge fund positions improved by 2 lately. Our calculations also showed that GWRE 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). GWRE was in 34 hedge funds’ portfolios at the end of the first quarter of 2020. There were 32 hedge funds in our database with GWRE 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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to go over the fresh hedge fund action regarding Guidewire Software Inc (NYSE:GWRE).

How have hedgies been trading Guidewire Software Inc (NYSE:GWRE)?

At the end of the first quarter, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the fourth quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in GWRE a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Is GWRE A Good Stock To Buy?

More specifically, Stockbridge Partners was the largest shareholder of Guidewire Software Inc (NYSE:GWRE), with a stake worth $323.6 million reported as of the end of September. Trailing Stockbridge Partners was D1 Capital Partners, which amassed a stake valued at $138.4 million. Route One Investment Company, Skye Global Management, and Bares Capital Management 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 Stockbridge Partners allocated the biggest weight to Guidewire Software Inc (NYSE:GWRE), around 12.83% of its 13F portfolio. MIG Capital is also relatively very bullish on the stock, dishing out 4.19 percent of its 13F equity portfolio to GWRE.

As aggregate interest increased, key money managers have been driving this bullishness. Route One Investment Company, managed by William Duhamel, assembled the biggest position in Guidewire Software Inc (NYSE:GWRE). Route One Investment Company had $52.7 million invested in the company at the end of the quarter. Charles Pollnow’s Triple Frond Partners also made a $29.6 million investment in the stock during the quarter. The other funds with brand new GWRE positions are Quincy Lee’s Ancient Art (Teton Capital), Greg Poole’s Echo Street Capital Management, and Tom Gayner’s Markel Gayner Asset Management.

Let’s check out hedge fund activity in other stocks similar to Guidewire Software Inc (NYSE:GWRE). We will take a look at ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), Perrigo Company (NASDAQ:PRGO), ABIOMED, Inc. (NASDAQ:ABMD), and Zynga Inc (NASDAQ:ZNGA). This group of stocks’ market valuations match GWRE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ACAD 28 2404189 -6
PRGO 28 463596 1
ABMD 27 522802 -8
ZNGA 59 1015313 11
Average 35.5 1101475 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.5 hedge funds with bullish positions and the average amount invested in these stocks was $1101 million. That figure was $757 million in GWRE’s case. Zynga Inc (NASDAQ:ZNGA) is the most popular stock in this table. On the other hand ABIOMED, Inc. (NASDAQ:ABMD) is the least popular one with only 27 bullish hedge fund positions. Guidewire Software Inc (NYSE:GWRE) 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on GWRE as the stock returned 39.8% during the second quarter and outperformed the market by an even larger margin.

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