Should You Avoid NextGen Healthcare, Inc. (NXGN)?

The Insider Monkey team has completed processing the quarterly 13F filings for the September quarter submitted by the hedge funds and other money managers included in our extensive database. Most hedge fund investors experienced strong gains on the back of a strong market performance, which certainly propelled them to adjust their equity holdings so as to maintain the desired risk profile. As a result, the relevancy of these public filings and their content is indisputable, as they may reveal numerous high-potential stocks. The following article will discuss the smart money sentiment towards NextGen Healthcare, Inc. (NASDAQ:NXGN).

Is NextGen Healthcare, Inc. (NASDAQ:NXGN) a bargain? Investors who are in the know are becoming less confident. The number of long hedge fund bets retreated by 2 lately. Our calculations also showed that NXGN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy  based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to review the recent hedge fund action encompassing NextGen Healthcare, Inc. (NASDAQ:NXGN).

How are hedge funds trading NextGen Healthcare, Inc. (NASDAQ:NXGN)?

At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the second quarter of 2019. On the other hand, there were a total of 13 hedge funds with a bullish position in NXGN a year ago. With hedge funds’ sentiment swirling, there exists a few key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in NextGen Healthcare, Inc. (NASDAQ:NXGN) was held by AQR Capital Management, which reported holding $10.5 million worth of stock at the end of September. It was followed by Millennium Management with a $6.3 million position. Other investors bullish on the company included Marshall Wace, Arrowstreet Capital, and D E Shaw. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to NextGen Healthcare, Inc. (NASDAQ:NXGN), around 0.34% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, dishing out 0.13 percent of its 13F equity portfolio to NXGN.

Due to the fact that NextGen Healthcare, Inc. (NASDAQ:NXGN) has experienced bearish sentiment from hedge fund managers, it’s easy to see that there was a specific group of funds that slashed their positions entirely last quarter. Interestingly, Benjamin A. Smith’s Laurion Capital Management said goodbye to the biggest stake of all the hedgies monitored by Insider Monkey, worth close to $0.2 million in stock. David Harding’s fund, Winton Capital Management, also said goodbye to its stock, about $0.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to NextGen Healthcare, Inc. (NASDAQ:NXGN). We will take a look at Universal Insurance Holdings, Inc. (NYSE:UVE), Kraton Corporation (NYSE:KRA), Patrick Industries, Inc. (NASDAQ:PATK), and Playa Hotels & Resorts N.V. (NASDAQ:PLYA). All of these stocks’ market caps resemble NXGN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UVE 14 62385 0
KRA 15 71046 -2
PATK 16 98893 1
PLYA 17 436123 -1
Average 15.5 167112 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $167 million. That figure was $32 million in NXGN’s case. Playa Hotels & Resorts N.V. (NASDAQ:PLYA) is the most popular stock in this table. On the other hand Universal Insurance Holdings, Inc. (NYSE:UVE) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks NextGen Healthcare, Inc. (NASDAQ:NXGN) is even less popular than UVE. Hedge funds clearly dropped the ball on NXGN as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on NXGN as the stock returned 17.5% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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