Here’s What Hedge Funds Think About Zuora, Inc. (ZUO)

“Market volatility has picked up again over the past few weeks. Headlines highlight risks regarding interest rates, the Fed, China, house prices, auto sales, trade wars, and more. Uncertainty abounds. But doesn’t it always? I have no view on whether the recent volatility will continue for a while, or whether the market will be back at all-time highs before we know it. I remain focused on preserving and growing our capital, and continue to believe that the best way to do so is via a value-driven, concentrated, patient approach. I shun consensus holdings, rich valuations, and market fads, in favor of solid, yet frequently off-the-beaten-path, businesses run by excellent, aligned management teams, purchased at deep discounts to intrinsic value,” are the words of Maran Capital’s Dan Roller. His stock picks have been beating the S&P 500 Index handily. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Zuora, Inc. (NYSE:ZUO) and see how it was affected.

Zuora, Inc. (NYSE:ZUO) was in 14 hedge funds’ portfolios at the end of the fourth quarter of 2018. ZUO investors should pay attention to a decrease in activity from the world’s largest hedge funds lately. There were 15 hedge funds in our database with ZUO holdings at the end of the previous quarter. Our calculations also showed that zuo isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

Colin Moran Abdiel Capital

Colin Moran Abdiel Capital

Let’s go over the key hedge fund action encompassing Zuora, Inc. (NYSE:ZUO).

Hedge fund activity in Zuora, Inc. (NYSE:ZUO)

At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ZUO over the last 14 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ZUO Positions

The largest stake in Zuora, Inc. (NYSE:ZUO) was held by Alkeon Capital Management, which reported holding $30.8 million worth of stock at the end of September. It was followed by Abdiel Capital Advisors with a $24.7 million position. Other investors bullish on the company included Cavalry Asset Management, Pentwater Capital Management, and Point72 Asset Management.

Due to the fact that Zuora, Inc. (NYSE:ZUO) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there is a sect of hedge funds who were dropping their full holdings in the third quarter. It’s worth mentioning that John Burbank’s Passport Capital sold off the largest stake of the “upper crust” of funds tracked by Insider Monkey, totaling about $11.3 million in stock, and David Fiszel’s Honeycomb Asset Management was right behind this move, as the fund said goodbye to about $9.2 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 1 funds in the third quarter.

Let’s now review hedge fund activity in other stocks similar to Zuora, Inc. (NYSE:ZUO). We will take a look at PDC Energy Inc (NASDAQ:PDCE), Atlantica Yield plc (NASDAQ:AY), Denali Therapeutics Inc. (NASDAQ:DNLI), and Sotheby’s (NYSE:BID). This group of stocks’ market values are closest to ZUO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PDCE 16 278321 -3
AY 22 325334 2
DNLI 5 11098 1
BID 16 359130 -9
Average 14.75 243471 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $243 million. That figure was $69 million in ZUO’s case. Atlantica Yield plc (NASDAQ:AY) is the most popular stock in this table. On the other hand Denali Therapeutics Inc. (NASDAQ:DNLI) is the least popular one with only 5 bullish hedge fund positions. Zuora, Inc. (NYSE:ZUO) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately ZUO wasn’t nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); ZUO investors were disappointed as the stock returned 6.5% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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