How Did Zendesk Inc (ZEN) Compare Against Top Hedge Fund Stocks in 2019?

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by nearly 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Zendesk Inc (NYSE:ZEN).

Is Zendesk Inc (NYSE:ZEN) ready to rally soon? The smart money is selling. The number of long hedge fund bets fell by 6 recently. Our calculations also showed that ZEN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Keith Meister of Corvex Capital

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a look at the recent hedge fund action encompassing Zendesk Inc (NYSE:ZEN).

What have hedge funds been doing with Zendesk Inc (NYSE:ZEN)?

At the end of the third quarter, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from the second quarter of 2019. By comparison, 44 hedge funds held shares or bullish call options in ZEN a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Tiger Global Management, managed by Chase Coleman, holds the largest position in Zendesk Inc (NYSE:ZEN). Tiger Global Management has a $214.8 million position in the stock, comprising 1.1% of its 13F portfolio. The second most bullish fund manager is Whale Rock Capital Management, led by Alex Sacerdote, holding a $196.3 million position; the fund has 3.6% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish contain Panayotis Takis Sparaggis’s Alkeon Capital Management, Brian Ashford-Russell and Tim Woolley’s Polar Capital and Greg Poole’s Echo Street Capital Management. In terms of the portfolio weights assigned to each position Half Sky Capital allocated the biggest weight to Zendesk Inc (NYSE:ZEN), around 12.13% of its 13F portfolio. Atalan Capital is also relatively very bullish on the stock, dishing out 6.33 percent of its 13F equity portfolio to ZEN.

Since Zendesk Inc (NYSE:ZEN) has faced declining sentiment from hedge fund managers, logic holds that there exists a select few hedgies that slashed their entire stakes heading into Q4. At the top of the heap, Josh Resnick’s Jericho Capital Asset Management said goodbye to the largest position of the “upper crust” of funds followed by Insider Monkey, valued at close to $71 million in stock, and Brandon Haley’s Holocene Advisors was right behind this move, as the fund dumped about $39.3 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 6 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Zendesk Inc (NYSE:ZEN). These stocks are Royal Gold, Inc (NASDAQ:RGLD), Sensata Technologies Holding plc (NYSE:ST), ABIOMED, Inc. (NASDAQ:ABMD), and Pool Corporation (NASDAQ:POOL). This group of stocks’ market valuations match ZEN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RGLD 25 126740 6
ST 20 1377652 -1
ABMD 21 580988 -7
POOL 26 402099 4
Average 23 621870 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $622 million. That figure was $1454 million in ZEN’s case. Pool Corporation (NASDAQ:POOL) is the most popular stock in this table. On the other hand Sensata Technologies Holding plc (NYSE:ST) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Zendesk Inc (NYSE:ZEN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on ZEN, though not to the same extent, as the stock returned 32.1% during the same period and outperformed the market as well.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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