How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cognizant Technology Solutions Corp (NASDAQ:CTSH).
Is CTSH stock a buy or sell? Cognizant Technology Solutions Corp (NASDAQ:CTSH) has seen an increase in hedge fund interest recently. Cognizant Technology Solutions Corp (NASDAQ:CTSH) was in 46 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 55. Our calculations also showed that CTSH isn’t among the 30 most popular stocks among hedge funds (click for Q4 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 S&P 500 ETFs by more than 124 percentage points since March 2017 (see the details here).
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. Recently Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best biotech stocks to invest in to pick the next stock that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage (or at the end of this article).Keeping this in mind we’re going to view the key hedge fund action surrounding Cognizant Technology Solutions Corp (NASDAQ:CTSH).
Do Hedge Funds Think CTSH Is A Good Stock To Buy Now?
At fourth quarter’s end, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 2% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CTSH over the last 22 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Generation Investment Management, managed by David Blood and Al Gore, holds the largest position in Cognizant Technology Solutions Corp (NASDAQ:CTSH). Generation Investment Management has a $1.1391 billion position in the stock, comprising 5.1% of its 13F portfolio. Sitting at the No. 2 spot is Pzena Investment Management, led by Richard S. Pzena, holding a $703.8 million position; 3.3% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that hold long positions contain Ric Dillon’s Diamond Hill Capital, Donald Yacktman’s Yacktman Asset Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Broad Peak Investment Holdings allocated the biggest weight to Cognizant Technology Solutions Corp (NASDAQ:CTSH), around 7.02% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, earmarking 5.08 percent of its 13F equity portfolio to CTSH.
Now, key money managers were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, initiated the most outsized position in Cognizant Technology Solutions Corp (NASDAQ:CTSH). Point72 Asset Management had $16.7 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also made a $5.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Frank Fu’s CaaS Capital, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Qing Li’s Sciencast Management.
Let’s now review hedge fund activity in other stocks similar to Cognizant Technology Solutions Corp (NASDAQ:CTSH). We will take a look at Ross Stores, Inc. (NASDAQ:ROST), Twitter Inc (NYSE:TWTR), TAL Education Group (NYSE:TAL), Marriott International Inc (NYSE:MAR), Enterprise Products Partners L.P. (NYSE:EPD), ConocoPhillips (NYSE:COP), and General Dynamics Corporation (NYSE:GD). This group of stocks’ market values resemble CTSH’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 48.7 hedge funds with bullish positions and the average amount invested in these stocks was $2205 million. That figure was $3517 million in CTSH’s case. Twitter Inc (NYSE:TWTR) is the most popular stock in this table. On the other hand TAL Education Group (NYSE:TAL) is the least popular one with only 29 bullish hedge fund positions. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CTSH is 48.4. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 5.3% in 2021 through March 19th and surpassed the market again by 0.8 percentage points. Unfortunately CTSH wasn’t nearly as popular as these 30 stocks (hedge fund sentiment was quite bearish); CTSH investors were disappointed as the stock returned -6.3% since the end of December (through 3/19) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.