Is DocuSign (DOCU) A Smart Long-Term Buy?

ClearBridge Investments, an investment management firm, published its “Aggressive Growth Strategy” second quarter 2021 investor letter – a copy of which can be downloaded here. The ClearBridge Aggressive Growth Strategy underperformed its Russell 3000 Growth Index benchmark in the second quarter. On an absolute basis, the Strategy generated gains across the eight sectors in which it was invested (out of 11 sectors total), with the information technology (IT) and communication services sectors the primary contributors. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

In the Q2 2021 investor letter of ClearBridge Investments, the fund mentioned DocuSign, Inc. (NASDAQ: DOCU), and discussed its stance on the firm. DocuSign, Inc. is a San Francisco, California-based agreement cloud eSignature solutions provider, that currently has a $54.1 billion market capitalization. DOCU delivered a 25.06% return since the beginning of the year, extending its 12-month revenues to 44.17%. The stock closed at $283.68 per share on July 13, 2021.

Here is what ClearBridge Investments has to say about DocuSign, Inc. in its Q2 2021 investor letter:

“We expect rapidly growing disruptors will comprise roughly a quarter of portfolio assets over time and repositioning over the next several quarters will focus on increasing our allocation to these stocks. Our objective with disruptors is to purchase companies early in the development of their market opportunity. DocuSign, a new purchase in the first quarter that we added to significantly over the last three months, is a company we have been following since it was private. Although the growth of its esignature business accelerated during COVID-19 lockdowns, DocuSign is targeting additional markets in today’s anywhere economy and its strong recent results eased fears that the company was simply a pandemic beneficiary.”

Signature, Finance

Photo by DocuSign on Unsplash

Based on our calculations, DocuSign, Inc. (NASDAQ: DOCU) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. DocuSign, Inc. was in 60 hedge fund portfolios at the end of the first quarter of 2021, compared to 67 funds in the fourth quarter of 2020. DOCU delivered a 23.16% return in the past 3 months.

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 115 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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla 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.

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