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Hedge Funds Aren’t Crazy About Zendesk Inc (ZEN) Anymore

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Zendesk Inc (NYSE:ZEN).

Zendesk Inc (NYSE:ZEN) has seen a decrease in enthusiasm from smart money of late. ZEN was in 55 hedge funds’ portfolios at the end of the first quarter of 2020. There were 61 hedge funds in our database with ZEN positions at the end of the previous quarter. Our calculations also showed that ZEN isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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 S&P 500 ETFs by 44 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 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.

Michael Stark Crosslink Capital

Michael Stark of Crosslink Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea.  For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this analyst’s “corona catalyst plays“. We interview hedge fund managers and ask them about best ideas. You can watch our latest hedge fund manager interview here and find out the name of the large-cap healthcare stock that Sio Capital’s Michael Castor expects to double. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a gander at the recent hedge fund action regarding Zendesk Inc (NYSE:ZEN).

How have hedgies been trading Zendesk Inc (NYSE:ZEN)?

At Q1’s end, a total of 55 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ZEN over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

More specifically, Whale Rock Capital Management was the largest shareholder of Zendesk Inc (NYSE:ZEN), with a stake worth $177.5 million reported as of the end of September. Trailing Whale Rock Capital Management was SCGE Management, which amassed a stake valued at $147.1 million. Cadian Capital, Corvex Capital, and Echo Street 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 Toronado Partners allocated the biggest weight to Zendesk Inc (NYSE:ZEN), around 10.37% of its 13F portfolio. Cota Capital is also relatively very bullish on the stock, dishing out 8.5 percent of its 13F equity portfolio to ZEN.

Due to the fact that Zendesk Inc (NYSE:ZEN) has witnessed bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of fund managers that slashed their full holdings by the end of the third quarter. At the top of the heap, Edmond M. Safra’s EMS Capital dumped the biggest position of all the hedgies watched by Insider Monkey, worth an estimated $97.8 million in stock, and Josh Resnick’s Jericho Capital Asset Management was right behind this move, as the fund dumped about $69.1 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 6 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Zendesk Inc (NYSE:ZEN) but similarly valued. We will take a look at Annaly Capital Management, Inc. (NYSE:NLY), Henry Schein, Inc. (NASDAQ:HSIC), Centrais Eletricas Brasileiras SA – Eletrobras (NYSE:EBR), and Avantor, Inc. (NYSE:AVTR). All of these stocks’ market caps resemble ZEN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NLY 27 224564 6
HSIC 35 1058541 -1
EBR 5 9710 -2
AVTR 29 521496 1
Average 24 453578 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $454 million. That figure was $1263 million in ZEN’s case. Henry Schein, Inc. (NASDAQ:HSIC) is the most popular stock in this table. On the other hand Centrais Eletricas Brasileiras SA – Eletrobras (NYSE:EBR) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Zendesk Inc (NYSE:ZEN) is more popular among hedge funds. 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 returned 7.9% in 2020 through May 22nd but still managed to beat the market by 15.6 percentage points. Hedge funds were also right about betting on ZEN as the stock returned 28% so far in Q2 (through May 22nd) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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