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 Paycom Software Inc (NYSE:PAYC) and determine whether hedge funds had an edge regarding this stock.
Paycom Software Inc (NYSE:PAYC) was in 40 hedge funds’ portfolios at the end of September. The all time high for this statistic is 46. PAYC investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 39 hedge funds in our database with PAYC positions at the end of the second quarter. Our calculations also showed that PAYC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now we’re going to take a gander at the latest hedge fund action encompassing Paycom Software Inc (NYSE:PAYC).
Ken Fisher of Fisher Asset Management
Do Hedge Funds Think PAYC Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2021, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from one quarter earlier. By comparison, 38 hedge funds held shares or bullish call options in PAYC 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 Paycom Software Inc (NYSE:PAYC) was held by Echo Street Capital Management, which reported holding $232.1 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $129.3 million position. Other investors bullish on the company included Fisher Asset Management, Cat Rock Capital, and Fundsmith LLP. In terms of the portfolio weights assigned to each position Cat Rock Capital allocated the biggest weight to Paycom Software Inc (NYSE:PAYC), around 10.3% of its 13F portfolio. Alta Park Capital is also relatively very bullish on the stock, designating 4.46 percent of its 13F equity portfolio to PAYC.
Now, key money managers were leading the bulls’ herd. Senator Investment Group, managed by Doug Silverman and Alexander Klabin, assembled the most outsized position in Paycom Software Inc (NYSE:PAYC). Senator Investment Group had $29.7 million invested in the company at the end of the quarter. Michael Rockefeller and KarláKroeker’s Woodline Partners also initiated a $21.2 million position during the quarter. The following funds were also among the new PAYC investors: Charles Clough’s Clough Capital Partners, David Fiszel’s Honeycomb Asset Management, and Lee Ainslie’s Maverick Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Paycom Software Inc (NYSE:PAYC) but similarly valued. We will take a look at ANSYS, Inc. (NASDAQ:ANSS), Fastenal Company (NASDAQ:FAST), ArcelorMittal (NYSE:MT), Ecopetrol S.A. (NYSE:EC), Ball Corporation (NYSE:BLL), Lennar Corporation (NYSE:LEN), and Fifth Third Bancorp (NASDAQ:FITB). All of these stocks’ market caps are similar to PAYC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ANSS | 38 | 1493156 | -8 |
| FAST | 30 | 609114 | 5 |
| MT | 20 | 1012692 | -2 |
| EC | 6 | 64885 | 0 |
| BLL | 27 | 1457074 | -17 |
| LEN | 50 | 1706131 | 0 |
| FITB | 28 | 283754 | -13 |
| Average | 28.4 | 946687 | -5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.4 hedge funds with bullish positions and the average amount invested in these stocks was $947 million. That figure was $1425 million in PAYC’s case. Lennar Corporation (NYSE:LEN) is the most popular stock in this table. On the other hand Ecopetrol S.A. (NYSE:EC) is the least popular one with only 6 bullish hedge fund positions. Paycom Software Inc (NYSE:PAYC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PAYC is 70.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, PAYC wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on PAYC were disappointed as the stock returned -32.4% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.
Follow Paycom Software Inc. (NYSE:PAYC)
Follow Paycom Software Inc. (NYSE:PAYC)
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Disclosure: None. This article was originally published at Insider Monkey.
