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Is Q2 Holdings Inc (QTWO) Going to Burn These Hedge Funds?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of Q2 Holdings Inc (NYSE:QTWO).

Q2 Holdings Inc (NYSE:QTWO) investors should be aware of a decrease in enthusiasm from smart money in recent months. QTWO was in 18 hedge funds’ portfolios at the end of the first quarter of 2020. There were 20 hedge funds in our database with QTWO positions at the end of the previous quarter. Our calculations also showed that QTWO isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 58 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.

Richard Driehaus of Driehaus Capital

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a peek at the new hedge fund action surrounding Q2 Holdings Inc (NYSE:QTWO).

Hedge fund activity in Q2 Holdings Inc (NYSE:QTWO)

At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in QTWO over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is QTWO A Good Stock To Buy?

Among these funds, Adams Street Partners held the most valuable stake in Q2 Holdings Inc (NYSE:QTWO), which was worth $93.2 million at the end of the third quarter. On the second spot was Tremblant Capital which amassed $64.1 million worth of shares. Columbus Circle Investors, Cota Capital, and Zevenbergen Capital Investments 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 Adams Street Partners allocated the biggest weight to Q2 Holdings Inc (NYSE:QTWO), around 23.24% of its 13F portfolio. Cota Capital is also relatively very bullish on the stock, earmarking 8.07 percent of its 13F equity portfolio to QTWO.

Due to the fact that Q2 Holdings Inc (NYSE:QTWO) has experienced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedge funds that elected to cut their positions entirely in the first quarter. It’s worth mentioning that Noam Gottesman’s GLG Partners said goodbye to the biggest investment of the 750 funds watched by Insider Monkey, worth close to $19.1 million in stock. Israel Englander’s fund, Millennium Management, also sold off its stock, about $13.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Q2 Holdings Inc (NYSE:QTWO). We will take a look at UniFirst Corp (NYSE:UNF), Watts Water Technologies Inc (NYSE:WTS), Avista Corp (NYSE:AVA), and Hamilton Lane Incorporated (NASDAQ:HLNE). This group of stocks’ market caps resemble QTWO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UNF 17 75902 -4
WTS 19 237163 0
AVA 18 145437 3
HLNE 9 68042 -1
Average 15.75 131636 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $132 million. That figure was $218 million in QTWO’s case. Watts Water Technologies Inc (NYSE:WTS) is the most popular stock in this table. On the other hand Hamilton Lane Incorporated (NASDAQ:HLNE) is the least popular one with only 9 bullish hedge fund positions. Q2 Holdings Inc (NYSE:QTWO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.4% in 2020 through June 22nd but still beat the market by 15.9 percentage points. Hedge funds were also right about betting on QTWO as the stock returned 41.7% in Q2 (through June 22nd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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