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Did Hedge Funds Make The Right Call On NIC Inc. (EGOV) ?

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 NIC Inc. (NASDAQ:EGOV) and determine whether hedge funds had an edge regarding this stock.

Is NIC Inc. (NASDAQ:EGOV) the right pick for your portfolio? Money managers were turning less bullish. The number of bullish hedge fund bets decreased by 5 in recent months. Our calculations also showed that EGOV 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). EGOV was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. There were 22 hedge funds in our database with EGOV holdings 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 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 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. With all of this in mind let’s take a look at the new hedge fund action regarding NIC Inc. (NASDAQ:EGOV).

Hedge fund activity in NIC Inc. (NASDAQ:EGOV)

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards EGOV 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.

When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the most valuable position in NIC Inc. (NASDAQ:EGOV), worth close to $40.6 million, amounting to less than 0.1%% of its total 13F portfolio. The second largest stake is held by D. E. Shaw of D E Shaw, with a $19.8 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions consist of Noam Gottesman’s GLG Partners, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Principal Global Investors’s Columbus Circle Investors. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to NIC Inc. (NASDAQ:EGOV), around 0.83% of its 13F portfolio. Columbus Circle Investors is also relatively very bullish on the stock, designating 0.38 percent of its 13F equity portfolio to EGOV.

Seeing as NIC Inc. (NASDAQ:EGOV) has faced declining sentiment from the smart money, we can see that there lies a certain “tier” of hedge funds that slashed their entire stakes heading into Q4. Interestingly, Paul Tudor Jones’s Tudor Investment Corp said goodbye to the biggest investment of all the hedgies monitored by Insider Monkey, totaling an estimated $0.9 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dumped its stock, about $0.5 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 5 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as NIC Inc. (NASDAQ:EGOV) but similarly valued. We will take a look at 21Vianet Group Inc (NASDAQ:VNET), KAR Auction Services Inc (NYSE:KAR), ForeScout Technologies, Inc. (NASDAQ:FSCT), and Kennametal Inc. (NYSE:KMT). All of these stocks’ market caps are similar to EGOV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VNET 15 129811 -1
KAR 21 203698 -5
FSCT 33 421646 12
KMT 17 147627 -2
Average 21.5 225696 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $226 million. That figure was $105 million in EGOV’s case. ForeScout Technologies, Inc. (NASDAQ:FSCT) is the most popular stock in this table. On the other hand 21Vianet Group Inc (NASDAQ:VNET) is the least popular one with only 15 bullish hedge fund positions. NIC Inc. (NASDAQ:EGOV) 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately EGOV wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); EGOV investors were disappointed as the stock returned -2.9% since Q1 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.

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