Should I Avoid Zscaler, Inc. (ZS)?

While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March, 2020 and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Zscaler, Inc. (NASDAQ:ZS).

Is Zscaler, Inc. (NASDAQ:ZS) a good investment now? The smart money was becoming less hopeful. The number of long hedge fund positions decreased by 1 in recent months. Zscaler, Inc. (NASDAQ:ZS) was in 34 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 35. Our calculations also showed that ZS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 115 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.

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 battery 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 take a look at the latest hedge fund action surrounding Zscaler, Inc. (NASDAQ:ZS).

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

At first quarter’s end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ZS over the last 23 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Two Sigma Advisors, managed by John Overdeck and David Siegel, holds the most valuable position in Zscaler, Inc. (NASDAQ:ZS). Two Sigma Advisors has a $204.3 million position in the stock, comprising 0.6% of its 13F portfolio. Coming in second is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $145.1 million position; 0.2% of its 13F portfolio is allocated to the stock. Other peers with similar optimism consist of D. E. Shaw’s D E Shaw, and Renaissance Technologies. In terms of the portfolio weights assigned to each position 0 allocated the biggest weight to Zscaler, Inc. (NASDAQ:ZS), around 6.28% of its 13F portfolio. 0 is also relatively very bullish on the stock, dishing out 2.95 percent of its 13F equity portfolio to ZS.

Due to the fact that Zscaler, Inc. (NASDAQ:ZS) has witnessed a decline in interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of hedge funds that slashed their full holdings in the first quarter. At the top of the heap, Alex Sacerdote’s Whale Rock Capital Management said goodbye to the largest investment of the “upper crust” of funds monitored by Insider Monkey, worth close to $295.1 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund said goodbye to about $55.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Zscaler, Inc. (NASDAQ:ZS). These stocks are PG&E Corporation (NYSE:PCG), Arista Networks Inc (NYSE:ANET), Yandex NV (NASDAQ:YNDX), Li Auto Inc. (NASDAQ:LI), United Microelectronics Corp (NYSE:UMC), ONEOK, Inc. (NYSE:OKE), and Baker Hughes Company (NYSE:BKR). This group of stocks’ market valuations match ZS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $1268 million. That figure was $810 million in ZS’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand United Microelectronics Corp (NYSE:UMC) is the least popular one with only 11 bullish hedge fund positions. Zscaler, Inc. (NASDAQ:ZS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ZS is 54.4. 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 19.3% in 2021 through June 25th and still beat the market by 4.8 percentage points. Hedge funds were also right about betting on ZS as the stock returned 27.5% since the end of Q1 (through 6/25) 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.

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