At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Tyler Technologies, Inc. (NYSE:TYL) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Tyler Technologies, Inc. (NYSE:TYL) has experienced an increase in activity from the world’s largest hedge funds lately. Tyler Technologies, Inc. (NYSE:TYL) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 31. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 30 hedge funds in our database with TYL holdings at the end of March. Our calculations also showed that TYL 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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 let’s take a gander at the new hedge fund action encompassing Tyler Technologies, Inc. (NYSE:TYL).
What have hedge funds been doing with Tyler Technologies, Inc. (NYSE:TYL)?
At second quarter’s end, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from the first quarter of 2020. On the other hand, there were a total of 24 hedge funds with a bullish position in TYL a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Tyler Technologies, Inc. (NYSE:TYL) was held by Praesidium Investment Management Company, which reported holding $102.2 million worth of stock at the end of September. It was followed by RGM Capital with a $65.6 million position. Other investors bullish on the company included Select Equity Group, Millennium Management, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Praesidium Investment Management Company allocated the biggest weight to Tyler Technologies, Inc. (NYSE:TYL), around 6.64% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, setting aside 4.06 percent of its 13F equity portfolio to TYL.
As industrywide interest jumped, some big names were leading the bulls’ herd. Select Equity Group, managed by Robert Joseph Caruso, initiated the largest position in Tyler Technologies, Inc. (NYSE:TYL). Select Equity Group had $57.1 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also initiated a $15.4 million position during the quarter. The following funds were also among the new TYL investors: Blair Baker’s Precept Capital Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Greg Eisner’s Engineers Gate Manager.
Let’s now take a look at hedge fund activity in other stocks similar to Tyler Technologies, Inc. (NYSE:TYL). We will take a look at ONEOK, Inc. (NYSE:OKE), Pembina Pipeline Corp (NYSE:PBA), Fifth Third Bancorp (NASDAQ:FITB), Ventas, Inc. (NYSE:VTR), Zebra Technologies Corporation (NASDAQ:ZBRA), Teva Pharmaceutical Industries Limited (NYSE:TEVA), and Nomura Holdings, Inc. (NYSE:NMR). This group of stocks’ market valuations are closest to TYL’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 23.1 hedge funds with bullish positions and the average amount invested in these stocks was $403 million. That figure was $534 million in TYL’s case. Zebra Technologies Corporation (NASDAQ:ZBRA) is the most popular stock in this table. On the other hand Nomura Holdings, Inc. (NYSE:NMR) is the least popular one with only 5 bullish hedge fund positions. Tyler Technologies, Inc. (NYSE:TYL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TYL is 87. 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 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately TYL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TYL were disappointed as the stock returned -0.5% 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.
Disclosure: None. This article was originally published at Insider Monkey.