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Hedge Funds Are Getting Out Of Healthequity Inc (HQY)

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 Healthequity Inc (NASDAQ:HQY) and determine whether hedge funds had an edge regarding this stock.

Healthequity Inc (NASDAQ:HQY) investors should be aware of a decrease in hedge fund interest in recent months. Healthequity Inc (NASDAQ:HQY) was in 18 hedge funds’ portfolios at the end of June. The all time high for this statistics is 23. There were 19 hedge funds in our database with HQY positions at the end of the first quarter. Our calculations also showed that HQY isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

To the average investor there are a large number of tools stock market investors use to assess their stock investments. A duo of the most innovative tools are hedge fund and insider trading moves. We have shown that, historically, those who follow the best picks of the elite investment managers can trounce the S&P 500 by a healthy margin (see the details here).

Ken Griffin

Ken Griffin of Citadel Investment Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a look at the new hedge fund action regarding Healthequity Inc (NASDAQ:HQY).

How are hedge funds trading Healthequity Inc (NASDAQ:HQY)?

At second quarter’s end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 23 hedge funds with a bullish position in HQY a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Is HQY A Good Stock To Buy?

Among these funds, Echo Street Capital Management held the most valuable stake in Healthequity Inc (NASDAQ:HQY), which was worth $78.1 million at the end of the third quarter. On the second spot was Dorsal Capital Management which amassed $29.3 million worth of shares. Citadel Investment Group, Rock Springs Capital Management, and PEAK6 Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Dorsal Capital Management allocated the biggest weight to Healthequity Inc (NASDAQ:HQY), around 1.81% of its 13F portfolio. Echo Street Capital Management is also relatively very bullish on the stock, earmarking 0.92 percent of its 13F equity portfolio to HQY.

Since Healthequity Inc (NASDAQ:HQY) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there is a sect of money managers that decided to sell off their full holdings in the second quarter. At the top of the heap, John Overdeck and David Siegel’s Two Sigma Advisors dropped the largest position of all the hedgies watched by Insider Monkey, worth an estimated $2.6 million in stock. Michael Castor’s fund, Sio Capital, also dropped its stock, about $1.6 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 1 funds in the second quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Healthequity Inc (NASDAQ:HQY) but similarly valued. These stocks are DXC Technology Company (NYSE:DXC), Jefferies Financial Group Inc. (NYSE:JEF), Ashland Global Holdings Inc.. (NYSE:ASH), TerraForm Power Inc (NASDAQ:TERP), Exponent, Inc. (NASDAQ:EXPO), Pilgrim’s Pride Corporation (NASDAQ:PPC), and Allison Transmission Holdings Inc (NYSE:ALSN). This group of stocks’ market valuations resemble HQY’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DXC 40 529806 -1
JEF 37 586275 7
ASH 32 976347 0
TERP 21 235830 4
EXPO 19 92487 2
PPC 15 59157 -3
ALSN 32 542648 5
Average 28 431793 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $432 million. That figure was $165 million in HQY’s case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand Pilgrim’s Pride Corporation (NASDAQ:PPC) is the least popular one with only 15 bullish hedge fund positions. Healthequity Inc (NASDAQ:HQY) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HQY is 33.5. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately HQY wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HQY investors were disappointed as the stock returned -12.4% in the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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