It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds’ favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like Cognizant Technology Solutions Corp (NASDAQ:CTSH) and compare its performance against hedge funds’ favorite stocks.
Is Cognizant Technology Solutions Corp (NASDAQ:CTSH) a buy, sell, or hold? Prominent investors are turning bullish. The number of long hedge fund positions advanced by 7 lately. Our calculations also showed that CTSH isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). CTSH was in 40 hedge funds’ portfolios at the end of September. There were 33 hedge funds in our database with CTSH holdings at the end of the previous quarter.
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 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.
Richard S. Pzena of Pzena Investment Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind we’re going to check out the new hedge fund action surrounding Cognizant Technology Solutions Corp (NASDAQ:CTSH).
How are hedge funds trading Cognizant Technology Solutions Corp (NASDAQ:CTSH)?
Heading into the fourth quarter of 2019, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in CTSH over the last 17 quarters. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Generation Investment Management, managed by David Blood and Al Gore, holds the largest position in Cognizant Technology Solutions Corp (NASDAQ:CTSH). Generation Investment Management has a $786.8 million position in the stock, comprising 5.6% of its 13F portfolio. The second largest stake is held by Pzena Investment Management, led by Richard S. Pzena, holding a $514.4 million position; 2.8% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism comprise Ken Griffin’s Citadel Investment Group, Cliff Asness’s AQR Capital Management and Donald Yacktman’s Yacktman Asset Management. In terms of the portfolio weights assigned to each position Generation Investment Management allocated the biggest weight to Cognizant Technology Solutions Corp (NASDAQ:CTSH), around 5.55% of its 13F portfolio. Indus Capital is also relatively very bullish on the stock, setting aside 4.75 percent of its 13F equity portfolio to CTSH.
Consequently, key money managers were breaking ground themselves. Kensico Capital, managed by Michael Lowenstein, assembled the largest position in Cognizant Technology Solutions Corp (NASDAQ:CTSH). Kensico Capital had $56.6 million invested in the company at the end of the quarter. Matthew Tewksbury’s Stevens Capital Management also initiated a $8.5 million position during the quarter. The other funds with brand new CTSH positions are Michael Kharitonov and Jon David McAuliffe’s Voleon Capital, David Harding’s Winton Capital Management, and Ray Dalio’s Bridgewater Associates.
Let’s now take a look at hedge fund activity in other stocks similar to Cognizant Technology Solutions Corp (NASDAQ:CTSH). We will take a look at eBay Inc (NASDAQ:EBAY), The Hershey Company (NYSE:HSY), Autodesk, Inc. (NASDAQ:ADSK), and China Unicom (Hong Kong) Limited (NYSE:CHU). All of these stocks’ market caps match CTSH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EBAY | 53 | 3488246 | 6 |
| HSY | 33 | 1103825 | 6 |
| ADSK | 45 | 2728142 | -11 |
| CHU | 8 | 65922 | 2 |
| Average | 34.75 | 1846534 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 34.75 hedge funds with bullish positions and the average amount invested in these stocks was $1847 million. That figure was $2369 million in CTSH’s case. eBay Inc (NASDAQ:EBAY) is the most popular stock in this table. On the other hand China Unicom (Hong Kong) Limited (NYSE:CHU) is the least popular one with only 8 bullish hedge fund positions. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CTSH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CTSH were disappointed as the stock returned -0.1% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
