Is Zscaler, Inc. (ZS) Going to Burn These Hedge Funds?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. In this article, we look at what those funds think of Zscaler, Inc. (NASDAQ:ZS) based on that data.

Zscaler, Inc. (NASDAQ:ZS) was in 27 hedge funds’ portfolios at the end of March. ZS investors should be aware of an increase in support from the world’s most elite money managers lately. There were 18 hedge funds in our database with ZS positions at the end of the previous quarter. Our calculations also showed that ZS 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.

Today there are a lot of indicators investors use to grade stocks. Two of the less known indicators are hedge fund and insider trading sentiment. We have shown that, historically, those who follow the best picks of the elite money managers can outclass their index-focused peers by a superb margin (see the details here).

Steven Cohen of Point72 Asset Management

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like these. 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. Now let’s go over the key hedge fund action regarding Zscaler, Inc. (NASDAQ:ZS).

How have hedgies been trading Zscaler, Inc. (NASDAQ:ZS)?

Heading into the second quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 50% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZS over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Whale Rock Capital Management held the most valuable stake in Zscaler, Inc. (NASDAQ:ZS), which was worth $122.2 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $41.1 million worth of shares. Two Sigma Advisors, Point72 Asset Management, and Cota Capital 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 Cota Capital allocated the biggest weight to Zscaler, Inc. (NASDAQ:ZS), around 10.5% of its 13F portfolio. Stony Point Capital is also relatively very bullish on the stock, earmarking 6.38 percent of its 13F equity portfolio to ZS.

As industrywide interest jumped, specific money managers have jumped into Zscaler, Inc. (NASDAQ:ZS) headfirst. Whale Rock Capital Management, managed by Alex Sacerdote, assembled the biggest position in Zscaler, Inc. (NASDAQ:ZS). Whale Rock Capital Management had $122.2 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $21.4 million position during the quarter. The other funds with new positions in the stock are D. E. Shaw’s D E Shaw, Joseph Samuels’s Islet Management, and Josh Goldberg’s G2 Investment Partners Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Zscaler, Inc. (NASDAQ:ZS) but similarly valued. These stocks are Everest Re Group Ltd (NYSE:RE), MGM Growth Properties LLC (NYSE:MGP), MongoDB, Inc. (NASDAQ:MDB), and United Airlines Holdings Inc (NASDAQ:UAL). All of these stocks’ market caps are closest to ZS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RE 27 558232 3
MGP 28 546863 -1
MDB 30 770189 -2
UAL 41 1908897 -21
Average 31.5 946045 -5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $946 million. That figure was $275 million in ZS’s case. United Airlines Holdings Inc (NASDAQ:UAL) is the most popular stock in this table. On the other hand Everest Re Group Ltd (NYSE:RE) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Zscaler, Inc. (NASDAQ:ZS) is even less popular than RE. Hedge funds clearly dropped the ball on ZS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on ZS as the stock returned 61.2% so far in the second quarter and outperformed the market by an even larger margin.

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