Did Hedge Funds Make The Right Call On HMS Holdings Corp. (HMSY) ?

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 HMS Holdings Corp. (NASDAQ:HMSY) and determine whether hedge funds skillfully traded this stock.

Is HMS Holdings Corp. (NASDAQ:HMSY) a bargain? The smart money was becoming less hopeful. The number of long hedge fund bets were trimmed by 5 lately. Our calculations also showed that HMSY 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). HMSY was in 20 hedge funds’ portfolios at the end of the first quarter of 2020. There were 25 hedge funds in our database with HMSY holdings at the end of the previous quarter.

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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 under-the-radar lithium 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 we’re going to take a gander at the latest hedge fund action surrounding HMS Holdings Corp. (NASDAQ:HMSY).

How are hedge funds trading HMS Holdings Corp. (NASDAQ:HMSY)?

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HMSY over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D E Shaw held the most valuable stake in HMS Holdings Corp. (NASDAQ:HMSY), which was worth $25.8 million at the end of the third quarter. On the second spot was Millennium Management which amassed $16.8 million worth of shares. Sectoral Asset Management, GLG Partners, and AQR 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 Sectoral Asset Management allocated the biggest weight to HMS Holdings Corp. (NASDAQ:HMSY), around 1.55% of its 13F portfolio. Manatuck Hill Partners is also relatively very bullish on the stock, designating 0.69 percent of its 13F equity portfolio to HMSY.

Judging by the fact that HMS Holdings Corp. (NASDAQ:HMSY) has experienced a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of money managers that slashed their full holdings by the end of the first quarter. Intriguingly, Arthur B Cohen and Joseph Healey’s Healthcor Management LP dumped the biggest stake of all the hedgies watched by Insider Monkey, worth an estimated $13.7 million in stock, and Mika Toikka’s AlphaCrest Capital Management was right behind this move, as the fund cut about $0.7 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 5 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as HMS Holdings Corp. (NASDAQ:HMSY) but similarly valued. These stocks are LiveRamp Holdings, Inc. (NYSE:RAMP), Piedmont Office Realty Trust, Inc. (NYSE:PDM), 1Life Healthcare, Inc. (NASDAQ:ONEM), and Bank of Hawaii Corporation (NYSE:BOH). This group of stocks’ market caps match HMSY’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $121 million. That figure was $78 million in HMSY’s case. Bank of Hawaii Corporation (NYSE:BOH) is the most popular stock in this table. On the other hand Piedmont Office Realty Trust, Inc. (NYSE:PDM) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks HMS Holdings Corp. (NASDAQ:HMSY) is more popular among hedge funds. 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 still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on HMSY, though not to the same extent, as the stock returned 27.8% since Q1 and outperformed the market as well.

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