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Hedge Funds Aren’t Done Buying Paychex, Inc. (PAYX)

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Paychex, Inc. (NASDAQ:PAYX) based on that data.

Paychex, Inc. (NASDAQ:PAYX) has seen an increase in hedge fund interest of late. Our calculations also showed that PAYX 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72% since March 2017 and outperformed the S&P 500 ETFs by more than 44 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Greenlight Capital

David Einhorn of Greenlight 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 successful trader’s “corona catalyst plays“. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. 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 the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to check out the key hedge fund action encompassing Paychex, Inc. (NASDAQ:PAYX).

Hedge fund activity in Paychex, Inc. (NASDAQ:PAYX)

Heading into the second quarter of 2020, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the previous quarter. By comparison, 21 hedge funds held shares or bullish call options in PAYX a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Paychex, Inc. (NASDAQ:PAYX) was held by Select Equity Group, which reported holding $323.6 million worth of stock at the end of September. It was followed by Echo Street Capital Management with a $56.6 million position. Other investors bullish on the company included D E Shaw, Millennium Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position Select Equity Group allocated the biggest weight to Paychex, Inc. (NASDAQ:PAYX), around 2.23% of its 13F portfolio. Hourglass Capital is also relatively very bullish on the stock, setting aside 2.1 percent of its 13F equity portfolio to PAYX.

As industrywide interest jumped, key money managers have been driving this bullishness. Renaissance Technologies, assembled the largest position in Paychex, Inc. (NASDAQ:PAYX). Renaissance Technologies had $13.2 million invested in the company at the end of the quarter. David Einhorn’s Greenlight Capital also initiated a $11.6 million position during the quarter. The other funds with new positions in the stock are Peter Seuss’s Prana Capital Management, Greg Eisner’s Engineers Gate Manager, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s also examine hedge fund activity in other stocks similar to Paychex, Inc. (NASDAQ:PAYX). We will take a look at O’Reilly Automotive Inc (NASDAQ:ORLY), KLA Corporation (NASDAQ:KLAC), Spotify Technology S.A. (NYSE:SPOT), and Agilent Technologies Inc. (NYSE:A). This group of stocks’ market valuations are similar to PAYX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ORLY 60 2486584 -4
KLAC 26 382931 -4
SPOT 40 1124522 2
A 35 2667892 -11
Average 40.25 1665482 -4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $1665 million. That figure was $643 million in PAYX’s case. O’Reilly Automotive Inc (NASDAQ:ORLY) is the most popular stock in this table. On the other hand KLA Corporation (NASDAQ:KLAC) is the least popular one with only 26 bullish hedge fund positions. Paychex, Inc. (NASDAQ:PAYX) 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 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 8.3% in 2020 through the end of May but beat the market by 13.2 percentage points. Unfortunately PAYX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PAYX were disappointed as the stock returned 16% during the same time period 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 many of these stocks already outperformed the market so far this year.

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

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