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Hedge Funds Were Selling Open Text Corporation (OTEX) Before Coronavirus

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. After several tireless days we have finished crunching the numbers from nearly 835 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms’ equity portfolios as of December 31st. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards Open Text Corporation (NASDAQ:OTEX).

Is Open Text Corporation (NASDAQ:OTEX) a splendid stock to buy now? Investors who are in the know are getting less optimistic. The number of long hedge fund bets went down by 1 recently. Our calculations also showed that OTEX isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). OTEX was in 14 hedge funds’ portfolios at the end of December. There were 15 hedge funds in our database with OTEX positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 41 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.

Clifton Robbins Blue Harbour

Clifton S. Robbins of Blue Harbour Group

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. Now let’s view the new hedge fund action surrounding Open Text Corporation (NASDAQ:OTEX).

What does smart money think about Open Text Corporation (NASDAQ:OTEX)?

At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in OTEX over the last 18 quarters. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Among these funds, Blue Harbour Group held the most valuable stake in Open Text Corporation (NASDAQ:OTEX), which was worth $166.4 million at the end of the third quarter. On the second spot was Praesidium Investment Management Company which amassed $157.4 million worth of shares. Renaissance Technologies, GLG Partners, and Two Sigma Advisors 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 Blue Harbour Group allocated the biggest weight to Open Text Corporation (NASDAQ:OTEX), around 11.41% of its 13F portfolio. Praesidium Investment Management Company is also relatively very bullish on the stock, setting aside 9.74 percent of its 13F equity portfolio to OTEX.

Judging by the fact that Open Text Corporation (NASDAQ:OTEX) has experienced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of funds who were dropping their entire stakes by the end of the third quarter. Interestingly, Craig C. Albert’s Sheffield Asset Management sold off the biggest position of the 750 funds monitored by Insider Monkey, comprising close to $4.6 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also cut its stock, about $0.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 1 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Open Text Corporation (NASDAQ:OTEX) but similarly valued. We will take a look at Noble Energy, Inc. (NASDAQ:NBL), The J.M. Smucker Company (NYSE:SJM), ASE Technology Holding Co., Ltd. (NYSE:ASX), and Huazhu Group Limited (NASDAQ:HTHT). This group of stocks’ market valuations match OTEX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NBL 28 488251 -1
SJM 31 450185 3
ASX 10 231824 2
HTHT 18 258810 2
Average 21.75 357268 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $357 million. That figure was $519 million in OTEX’s case. The J.M. Smucker Company (NYSE:SJM) is the most popular stock in this table. On the other hand ASE Technology Holding Co., Ltd. (NYSE:ASX) is the least popular one with only 10 bullish hedge fund positions. Open Text Corporation (NASDAQ:OTEX) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately OTEX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); OTEX investors were disappointed as the stock returned -26% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.

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

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