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Did Hedge Funds Make The Right Call On TriNet Group Inc (TNET) ?

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 TriNet Group Inc (NYSE:TNET) and determine whether hedge funds had an edge regarding this stock.

TriNet Group Inc (NYSE:TNET) investors should pay attention to a decrease in activity from the world’s largest hedge funds of late. Our calculations also showed that TNET 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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 key hedge fund action encompassing TriNet Group Inc (NYSE:TNET).

How are hedge funds trading TriNet Group Inc (NYSE:TNET)?

Heading into the second quarter of 2020, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TNET over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is TNET A Good Stock To Buy?

More specifically, Cantillon Capital Management was the largest shareholder of TriNet Group Inc (NYSE:TNET), with a stake worth $151.7 million reported as of the end of September. Trailing Cantillon Capital Management was Harbor Spring Capital, which amassed a stake valued at $38.6 million. Two Sigma Advisors, D E Shaw, and Millennium 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 Harbor Spring Capital allocated the biggest weight to TriNet Group Inc (NYSE:TNET), around 4.69% of its 13F portfolio. Stadium Capital Management is also relatively very bullish on the stock, dishing out 1.81 percent of its 13F equity portfolio to TNET.

Since TriNet Group Inc (NYSE:TNET) has experienced falling interest from the aggregate hedge fund industry, logic holds that there is a sect of hedgies who sold off their positions entirely by the end of the first quarter. At the top of the heap, Parag Vora’s HG Vora Capital Management cut the largest investment of the 750 funds tracked by Insider Monkey, worth about $42.5 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund dropped about $11 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 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 TriNet Group Inc (NYSE:TNET) but similarly valued. These stocks are II-VI, Inc. (NASDAQ:IIVI), Cushman & Wakefield plc (NYSE:CWK), Coherent, Inc. (NASDAQ:COHR), and Viavi Solutions Inc (NASDAQ:VIAV). This group of stocks’ market valuations are closest to TNET’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IIVI 20 99773 2
CWK 15 89918 -3
COHR 23 172545 -5
VIAV 31 305459 -6
Average 22.25 166924 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $167 million. That figure was $230 million in TNET’s case. Viavi Solutions Inc (NASDAQ:VIAV) is the most popular stock in this table. On the other hand Cushman & Wakefield plc (NYSE:CWK) is the least popular one with only 15 bullish hedge fund positions. TriNet Group Inc (NYSE:TNET) 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on TNET as the stock returned 67.3% since the end of March and outperformed the market by an even larger margin.

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