Is Varonis Systems Inc (VRNS) A Good Stock To Buy?

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 750 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Varonis Systems Inc (NASDAQ:VRNS), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is Varonis Systems Inc (NASDAQ:VRNS) a buy, sell, or hold? The best stock pickers are getting less optimistic. The number of bullish hedge fund bets were cut by 1 lately. Our calculations also showed that VRNS isn’t among the 30 most popular stocks among hedge funds (see the video below). VRNS was in 24 hedge funds’ portfolios at the end of June. There were 25 hedge funds in our database with VRNS holdings at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 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.

Gil Simon of SoMa Equity Partners

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to check out the new hedge fund action surrounding Varonis Systems Inc (NASDAQ:VRNS).

How have hedgies been trading Varonis Systems Inc (NASDAQ:VRNS)?

At Q2’s end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the first quarter of 2019. On the other hand, there were a total of 26 hedge funds with a bullish position in VRNS a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

No of Hedge Funds with VRNS Positions

Among these funds, SoMa Equity Partners held the most valuable stake in Varonis Systems Inc (NASDAQ:VRNS), which was worth $65 million at the end of the second quarter. On the second spot was Cadian Capital which amassed $61.3 million worth of shares. Moreover, Atalan Capital, Holocene Advisors, and Tremblant Capital were also bullish on Varonis Systems Inc (NASDAQ:VRNS), allocating a large percentage of their portfolios to this stock.

Due to the fact that Varonis Systems Inc (NASDAQ:VRNS) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of fund managers who sold off their entire stakes in the second quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest investment of the “upper crust” of funds followed by Insider Monkey, comprising about $6 million in call options, and Frank Slattery’s Symmetry Peak Management was right behind this move, as the fund sold off about $0.6 million worth. These transactions are interesting, as total hedge fund interest fell by 1 funds in the second quarter.

Let’s now review hedge fund activity in other stocks similar to Varonis Systems Inc (NASDAQ:VRNS). These stocks are Allakos Inc. (NASDAQ:ALLK), Veoneer, Inc. (NYSE:VNE), Northwest Bancshares, Inc. (NASDAQ:NWBI), and Diodes Incorporated (NASDAQ:DIOD). This group of stocks’ market valuations match VRNS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ALLK 8 176357 -1
VNE 12 204221 4
NWBI 13 69252 2
DIOD 18 114161 -1
Average 12.75 140998 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $141 million. That figure was $351 million in VRNS’s case. Diodes Incorporated (NASDAQ:DIOD) is the most popular stock in this table. On the other hand Allakos Inc. (NASDAQ:ALLK) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Varonis Systems Inc (NASDAQ:VRNS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately VRNS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on VRNS were disappointed as the stock returned -3.5% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market in Q3.

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