Paycom Software Inc (NYSE:PAYC) and Dean Foods Co (NYSE:DF) were among the stocks falling in the after-hours trading session yesterday. The bearish investor sentiment surrounding these companies was inspired by very different reasons, which we’ll analyze below.
Paycom Software announced a secondary offering of 4.5 million shares of common stock, with the primary selling done by WCAS, executive officers of the company, and some other shareholders. The offering comes with a 30-day additional purchase option for underwriters to buy up to 675,000 shares of Paycom. The shares of the company dropped by 5.79% in the after-hours session despite a 4.70% growth registered in the regular trading session.
Paycom Software Inc (NYSE:PAYC) has performed well in 2015, with its shares improving by 55.66% year-to-date. The stock has received an average rating of ‘Buy’ from six analysts covering the stock, who have a short-term price target of $40.43 for the company. The SaaS-based solution provider reported its second quarter 2015 financial results on August 4, announcing revenues of $49.0 million with GAAP earnings per diluted share of $0.10. The market was expecting earnings of $0.06 per share over revenues of $45.8 million for the quarter. Heading into the third quarter, the hedge funds in our database more than doubled their aggregate holdings in Paycom Software during the second quarter, to $68.90 million. The number of hedge funds holding positions in the technology company was up by eight to 18 hedgies during that time. It is important to consider that the shares of Paycom Software were up by 6.52% in the second quarter, which contributed slightly towards the increase, but nonetheless indicates heavy purchase activity from hedge funds.
Driehaus Capital, led by Richard Driehaus, was the largest stakeholder of Paycom Software Inc (NYSE:PAYC) in our database, holding 606,318 million shares valued at $20.71 million. Millennium Management LLC and Citadel Advisors were among some of the other major shareholders of the company, with 154,852 shares and 123,093 shares, respectively. Insiders maintained a similar sentiment for the company, with Frederick C. Peters, an Independent Director at Paycom Software, purchasing 4,500 shares in 2015, to give him 20,000 shares in his portfolio.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 36 months and outperformed the S&P 500 Index by over 60 percentage points (see the details here).