Should I Avoid Varonis Systems Inc (VRNS)?

Last year we predicted the arrival of the first US recession since 2009 and we told in advance that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Varonis Systems Inc (NASDAQ:VRNS).

Varonis Systems Inc (NASDAQ:VRNS) shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. Varonis Systems Inc (NASDAQ:VRNS) was in 24 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 32. There were 32 hedge funds in our database with VRNS holdings at the end of March. Our calculations also showed that VRNS isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 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.

Alex Litowitz Magnetar Capital

Alec Litowitz of Magnetar Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV 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. Keeping this in mind let’s review the fresh hedge fund action surrounding Varonis Systems Inc (NASDAQ:VRNS).

Do Hedge Funds Think VRNS Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. By comparison, 28 hedge funds held shares or bullish call options in VRNS a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Brett Barakett’s Tremblant Capital has the biggest position in Varonis Systems Inc (NASDAQ:VRNS), worth close to $80.1 million, accounting for 2.2% of its total 13F portfolio. On Tremblant Capital’s heels is Matrix Capital Management, led by David Goel and Paul Ferri, holding a $71.9 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors with similar optimism encompass John Overdeck and David Siegel’s Two Sigma Advisors, Renaissance Technologies and Josh Goldberg’s G2 Investment Partners Management. In terms of the portfolio weights assigned to each position Andar Capital allocated the biggest weight to Varonis Systems Inc (NASDAQ:VRNS), around 7.82% of its 13F portfolio. One01 Capital is also relatively very bullish on the stock, designating 5.02 percent of its 13F equity portfolio to VRNS.

Due to the fact that Varonis Systems Inc (NASDAQ:VRNS) has experienced declining sentiment from the smart money, it’s safe to say that there exists a select few hedge funds who were dropping their full holdings by the end of the second quarter. At the top of the heap, Eric Bannasch’s Cadian Capital dumped the largest investment of the “upper crust” of funds followed by Insider Monkey, worth close to $17.8 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund cut about $12.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 8 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks similar to Varonis Systems Inc (NASDAQ:VRNS). We will take a look at Penske Automotive Group, Inc. (NYSE:PAG), Tandem Diabetes Care Inc (NASDAQ:TNDM), Landstar System, Inc. (NASDAQ:LSTR), Ingredion Incorporated (NYSE:INGR), CDK Global Inc (NASDAQ:CDK), Popular Inc (NASDAQ:BPOP), and Primerica, Inc. (NYSE:PRI). This group of stocks’ market values resemble VRNS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PAG 19 188147 7
TNDM 32 352984 7
LSTR 16 157149 1
INGR 21 383586 -4
CDK 24 225691 6
BPOP 33 840477 -1
PRI 20 486272 0
Average 23.6 376329 2.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.6 hedge funds with bullish positions and the average amount invested in these stocks was $376 million. That figure was $337 million in VRNS’s case. Popular Inc (NASDAQ:BPOP) is the most popular stock in this table. On the other hand Landstar System, Inc. (NASDAQ:LSTR) is the least popular one with only 16 bullish hedge fund positions. Varonis Systems Inc (NASDAQ:VRNS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VRNS is 43. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on VRNS as the stock returned 9.7% since the end of Q2 (through 10/22) 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.