Did Hedge Funds Make The Right Call On LogMeIn Inc (LOGM) ?

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 LogMeIn Inc (NASDAQ:LOGM) and determine whether hedge funds skillfully traded this stock.

LogMeIn Inc (NASDAQ:LOGM) has experienced a decrease in hedge fund interest in recent months. LOGM was in 28 hedge funds’ portfolios at the end of March. There were 31 hedge funds in our database with LOGM holdings at the end of the previous quarter. Our calculations also showed that LOGM 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.

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. Keeping this in mind let’s take a look at the latest hedge fund action regarding LogMeIn Inc (NASDAQ:LOGM).

What does smart money think about LogMeIn Inc (NASDAQ:LOGM)?

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. On the other hand, there were a total of 27 hedge funds with a bullish position in LOGM a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

More specifically, Water Island Capital was the largest shareholder of LogMeIn Inc (NASDAQ:LOGM), with a stake worth $122.6 million reported as of the end of September. Trailing Water Island Capital was Elliott Management, which amassed a stake valued at $112.7 million. Alpine Associates, Omni Partners, and TIG Advisors 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 Sand Grove Capital Partners allocated the biggest weight to LogMeIn Inc (NASDAQ:LOGM), around 9.43% of its 13F portfolio. Water Island Capital is also relatively very bullish on the stock, earmarking 8.86 percent of its 13F equity portfolio to LOGM.

Because LogMeIn Inc (NASDAQ:LOGM) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of funds that elected to cut their positions entirely in the first quarter. Interestingly,  Renaissance Technologies dropped the largest position of all the hedgies watched by Insider Monkey, comprising close to $58.1 million in stock, and David Paradice’s Paradice Investment Management was right behind this move, as the fund cut about $42.4 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 3 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to LogMeIn Inc (NASDAQ:LOGM). We will take a look at Anaplan, Inc. (NYSE:PLAN), Xerox Holdings Corporation (NYSE:XRX), Autoliv Inc. (NYSE:ALV), and Black Hills Corporation (NYSE:BKH). This group of stocks’ market valuations match LOGM’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $754 million. That figure was $759 million in LOGM’s case. Anaplan, Inc. (NYSE:PLAN) is the most popular stock in this table. On the other hand Autoliv Inc. (NYSE:ALV) is the least popular one with only 15 bullish hedge fund positions. LogMeIn Inc (NASDAQ:LOGM) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 and surpassed the market by 15.5 percentage points. Unfortunately LOGM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); LOGM investors were disappointed as the stock returned 1.8% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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