Should I Buy Cornerstone OnDemand, Inc. (CSOD)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. 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 Cornerstone OnDemand, Inc. (NASDAQ:CSOD) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Cornerstone OnDemand, Inc. (NASDAQ:CSOD) investors should be aware of an increase in enthusiasm from smart money recently. Cornerstone OnDemand, Inc. (NASDAQ:CSOD) was in 31 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 34. Our calculations also showed that CSOD isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 58 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we’re going to take a gander at the fresh hedge fund action regarding Cornerstone OnDemand, Inc. (NASDAQ:CSOD).

Hedge fund activity in Cornerstone OnDemand, Inc. (NASDAQ:CSOD)

At second quarter’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 29% from one quarter earlier. By comparison, 27 hedge funds held shares or bullish call options in CSOD a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Rivulet Capital held the most valuable stake in Cornerstone OnDemand, Inc. (NASDAQ:CSOD), which was worth $156.7 million at the end of the third quarter. On the second spot was RGM Capital which amassed $85.8 million worth of shares. P2 Capital Partners, Brahman Capital, and Two Sigma Advisors 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 Indaba Capital Management allocated the biggest weight to Cornerstone OnDemand, Inc. (NASDAQ:CSOD), around 10.51% of its 13F portfolio. Rivulet Capital is also relatively very bullish on the stock, dishing out 10.21 percent of its 13F equity portfolio to CSOD.

As one would reasonably expect, some big names have jumped into Cornerstone OnDemand, Inc. (NASDAQ:CSOD) headfirst. P2 Capital Partners, managed by Claus Moller, assembled the most outsized position in Cornerstone OnDemand, Inc. (NASDAQ:CSOD). P2 Capital Partners had $61.8 million invested in the company at the end of the quarter. Mitch Kuflik and Rob Sobel’s Brahman Capital also made a $45.4 million investment in the stock during the quarter. The following funds were also among the new CSOD investors: Renaissance Technologies, Sahm Adrangi’s Kerrisdale Capital, and Parvinder Thiara’s Athanor Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Cornerstone OnDemand, Inc. (NASDAQ:CSOD) but similarly valued. These stocks are National General Holdings Corp (NASDAQ:NGHC), Shenandoah Telecommunications Company (NASDAQ:SHEN), Bank of Hawaii Corporation (NYSE:BOH), Option Care Health, Inc. (NASDAQ:OPCH), Premier Inc (NASDAQ:PINC), Valmont Industries, Inc. (NYSE:VMI), and National Vision Holdings, Inc. (NASDAQ:EYE). This group of stocks’ market valuations are similar to CSOD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NGHC 17 241316 -1
SHEN 8 90518 -3
BOH 18 75639 1
OPCH 11 25219 4
PINC 15 185986 -2
VMI 27 255232 3
EYE 17 296472 3
Average 16.1 167197 0.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.1 hedge funds with bullish positions and the average amount invested in these stocks was $167 million. That figure was $565 million in CSOD’s case. Valmont Industries, Inc. (NYSE:VMI) is the most popular stock in this table. On the other hand Shenandoah Telecommunications Company (NASDAQ:SHEN) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Cornerstone OnDemand, Inc. (NASDAQ:CSOD) is more popular among hedge funds. Our overall hedge fund sentiment score for CSOD is 87.4. 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 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 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Unfortunately CSOD wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CSOD were disappointed as the stock returned -8.2% since the end of the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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