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Hedge Funds Are Souring On Guidewire Software Inc (GWRE)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Guidewire Software Inc (NYSE:GWRE) and determine whether hedge funds skillfully traded this stock.

Guidewire Software Inc (NYSE:GWRE) has seen a decrease in hedge fund interest recently. Guidewire Software Inc (NYSE:GWRE) was in 29 hedge funds’ portfolios at the end of June. The all time high for this statistics is 34. There were 34 hedge funds in our database with GWRE positions at the end of the first quarter. Our calculations also showed that GWRE 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

BRIDGEWATER ASSOCIATES

Ray Dalio of Bridgewater Associates

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind we’re going to view the new hedge fund action surrounding Guidewire Software Inc (NYSE:GWRE).

How are hedge funds trading Guidewire Software Inc (NYSE:GWRE)?

At the end of June, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards GWRE over the last 20 quarters. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

The largest stake in Guidewire Software Inc (NYSE:GWRE) was held by Stockbridge Partners, which reported holding $460.2 million worth of stock at the end of September. It was followed by Darsana Capital Partners with a $104.9 million position. Other investors bullish on the company included Route One Investment Company, Triple Frond Partners, and Skye Global Management. In terms of the portfolio weights assigned to each position Stockbridge Partners allocated the biggest weight to Guidewire Software Inc (NYSE:GWRE), around 14.44% of its 13F portfolio. Darsana Capital Partners is also relatively very bullish on the stock, earmarking 6.22 percent of its 13F equity portfolio to GWRE.

Judging by the fact that Guidewire Software Inc (NYSE:GWRE) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedgies that elected to cut their entire stakes in the second quarter. Interestingly, Daniel Sundheim’s D1 Capital Partners sold off the largest stake of the “upper crust” of funds watched by Insider Monkey, valued at close to $138.4 million in stock, and Quincy Lee’s Ancient Art (Teton Capital) was right behind this move, as the fund dumped about $8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 5 funds in the second quarter.

Let’s also examine hedge fund activity in other stocks similar to Guidewire Software Inc (NYSE:GWRE). These stocks are Brookfield Property Partners LP (NASDAQ:BPY), Fidelity National Financial Inc (NYSE:FNF), Huntington Bancshares Incorporated (NASDAQ:HBAN), Zynga Inc (NASDAQ:ZNGA), PulteGroup, Inc. (NYSE:PHM), Suzano S.A. (NYSE:SUZ), and Vistra Corp. (NYSE:VST). This group of stocks’ market valuations are similar to GWRE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BPY 6 43730 -1
FNF 47 1052423 4
HBAN 30 90448 1
ZNGA 52 1094586 -7
PHM 42 866135 6
SUZ 3 28866 0
VST 42 1561642 3
Average 31.7 676833 0.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.7 hedge funds with bullish positions and the average amount invested in these stocks was $677 million. That figure was $1009 million in GWRE’s case. Zynga Inc (NASDAQ:ZNGA) is the most popular stock in this table. On the other hand Suzano S.A. (NYSE:SUZ) is the least popular one with only 3 bullish hedge fund positions. Guidewire Software Inc (NYSE:GWRE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for GWRE is 52.1. 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 23.8% in 2020 through September 14th and surpassed the market by 17.6 percentage points. Unfortunately GWRE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); GWRE investors were disappointed as the stock returned -4.3% since Q2 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.