Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying for a while now that the current market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the third quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to HMS Holdings Corp. (NASDAQ:HMSY) changed recently.
Is HMS Holdings Corp. (NASDAQ:HMSY) ready to rally soon? Investors who are in the know are buying. The number of long hedge fund bets went up by 5 lately. Our calculations also showed that HMSY isn’t among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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.
We’re going to take a look at the recent hedge fund action regarding HMS Holdings Corp. (NASDAQ:HMSY).
How are hedge funds trading HMS Holdings Corp. (NASDAQ:HMSY)?
Heading into the fourth quarter of 2018, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 45% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HMSY over the last 13 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
Of the funds tracked by Insider Monkey, D E Shaw, managed by D. E. Shaw, holds the most valuable position in HMS Holdings Corp. (NASDAQ:HMSY). D E Shaw has a $27.5 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by GLG Partners, led by Noam Gottesman, holding a $14.3 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism contain Ken Griffin’s Citadel Investment Group, Joel Greenblatt’s Gotham Asset Management and John Overdeck and David Siegel’s Two Sigma Advisors.
As aggregate interest increased, key hedge funds have been driving this bullishness. PDT Partners, managed by Peter Muller, created the most outsized position in HMS Holdings Corp. (NASDAQ:HMSY). PDT Partners had $1.6 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $1.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Jim Simons’s Renaissance Technologies, Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management, and Bruce Kovner’s Caxton Associates LP.
Let’s check out hedge fund activity in other stocks similar to HMS Holdings Corp. (NASDAQ:HMSY). We will take a look at Ormat Technologies, Inc. (NYSE:ORA), Tech Data Corp (NASDAQ:TECD), Callon Petroleum Company (NYSE:CPE), and Switch, Inc. (NYSE:SWCH). This group of stocks’ market valuations resemble HMSY’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $208 million. That figure was $65 million in HMSY’s case. Callon Petroleum Company (NYSE:CPE) is the most popular stock in this table. On the other hand Ormat Technologies, Inc. (NYSE:ORA) is the least popular one with only 7 bullish hedge fund positions. HMS Holdings Corp. (NASDAQ:HMSY) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard CPE might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.