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 DocuSign, Inc. (NASDAQ:DOCU).
DocuSign, Inc. (NASDAQ:DOCU) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 26 hedge funds’ portfolios at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as AXA Equitable Holdings, Inc. (NYSE:EQH), The AES Corporation (NYSE:AES), and Everest Re Group Ltd (NYSE:RE) to gather more data points. Our calculations also showed that DOCU isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
David E. Shaw of D.E. Shaw
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a gander at the new hedge fund action encompassing DocuSign, Inc. (NASDAQ:DOCU).
How have hedgies been trading DocuSign, Inc. (NASDAQ:DOCU)?
Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards DOCU over the last 17 quarters. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in DocuSign, Inc. (NASDAQ:DOCU) was held by D E Shaw, which reported holding $222.3 million worth of stock at the end of September. It was followed by Matrix Capital Management with a $107.8 million position. Other investors bullish on the company included Jericho Capital Asset Management, Millennium Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position ThornTree Capital Partners allocated the biggest weight to DocuSign, Inc. (NASDAQ:DOCU), around 12.04% of its portfolio. Jericho Capital Asset Management is also relatively very bullish on the stock, earmarking 4.4 percent of its 13F equity portfolio to DOCU.
Due to the fact that DocuSign, Inc. (NASDAQ:DOCU) has experienced bearish sentiment from hedge fund managers, it’s safe to say that there is a sect of funds who sold off their positions entirely last quarter. Interestingly, David Fiszel’s Honeycomb Asset Management dumped the largest stake of the “upper crust” of funds followed by Insider Monkey, worth about $36.8 million in stock, and Nick Niell’s Arrowgrass Capital Partners was right behind this move, as the fund said goodbye to about $18.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now take a look at hedge fund activity in other stocks similar to DocuSign, Inc. (NASDAQ:DOCU). We will take a look at AXA Equitable Holdings, Inc. (NYSE:EQH), The AES Corporation (NYSE:AES), Everest Re Group Ltd (NYSE:RE), and Varian Medical Systems, Inc. (NYSE:VAR). All of these stocks’ market caps match DOCU’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EQH | 21 | 1062610 | -11 |
| AES | 24 | 441027 | -3 |
| RE | 21 | 667060 | -2 |
| VAR | 27 | 381320 | 2 |
| Average | 23.25 | 638004 | -3.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $638 million. That figure was $674 million in DOCU’s case. Varian Medical Systems, Inc. (NYSE:VAR) is the most popular stock in this table. On the other hand AXA Equitable Holdings, Inc. (NYSE:EQH) is the least popular one with only 21 bullish hedge fund positions. DocuSign, Inc. (NASDAQ:DOCU) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on DOCU as the stock returned 15% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
