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Did Hedge Funds Make The Right Call On Zuora, Inc. (ZUO) ?

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 Zuora, Inc. (NYSE:ZUO) and determine whether hedge funds skillfully traded this stock.

Is Zuora, Inc. (NYSE:ZUO) an excellent stock to buy now? The smart money was in a bearish mood. The number of bullish hedge fund bets decreased by 3 recently. Our calculations also showed that ZUO 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). ZUO was in 23 hedge funds’ portfolios at the end of the first quarter of 2020. There were 26 hedge funds in our database with ZUO 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.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. 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 if you have any good ideas send us an email. Now we’re going to take a glance at the key hedge fund action surrounding Zuora, Inc. (NYSE:ZUO).

What have hedge funds been doing with Zuora, Inc. (NYSE:ZUO)?

At Q1’s end, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the fourth quarter of 2019. On the other hand, there were a total of 21 hedge funds with a bullish position in ZUO a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Zuora, Inc. (NYSE:ZUO) was held by Hound Partners, which reported holding $27.3 million worth of stock at the end of September. It was followed by SQN Investors with a $25.9 million position. Other investors bullish on the company included Bares Capital Management, Renaissance Technologies, and Citadel Investment Group. In terms of the portfolio weights assigned to each position SQN Investors allocated the biggest weight to Zuora, Inc. (NYSE:ZUO), around 2.62% of its 13F portfolio. Hound Partners is also relatively very bullish on the stock, dishing out 2.55 percent of its 13F equity portfolio to ZUO.

Since Zuora, Inc. (NYSE:ZUO) has faced declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of funds that elected to cut their full holdings in the first quarter. Interestingly, Greg Poole’s Echo Street Capital Management sold off the biggest position of all the hedgies watched by Insider Monkey, comprising about $10.2 million in stock. Constantinos J. Christofilis’s fund, Archon Capital Management, also sold off its stock, about $7.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to Zuora, Inc. (NYSE:ZUO). These stocks are Scientific Games Corp (NASDAQ:SGMS), Trupanion Inc (NASDAQ:TRUP), Covetrus, Inc. (NASDAQ:CVET), and TriCo Bancshares (NASDAQ:TCBK). This group of stocks’ market caps are closest to ZUO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SGMS 22 226145 -11
TRUP 13 140895 0
CVET 22 114918 2
TCBK 10 30127 -1
Average 16.75 128021 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $128 million. That figure was $103 million in ZUO’s case. Scientific Games Corp (NASDAQ:SGMS) is the most popular stock in this table. On the other hand TriCo Bancshares (NASDAQ:TCBK) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Zuora, Inc. (NYSE:ZUO) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on ZUO as the stock returned 58.4% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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