Were Hedge Funds Right About Crowding Into Zscaler, Inc. (ZS)?

Is Zscaler, Inc. (NASDAQ:ZS) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Zscaler, Inc. (NASDAQ:ZS) a great investment today? Money managers were in a bullish mood. The number of bullish hedge fund positions went up by 8 in recent months. Zscaler, Inc. (NASDAQ:ZS) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 28. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ZS 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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. 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 website to get excerpts of these letters in your inbox. Now let’s go over the key hedge fund action regarding Zscaler, Inc. (NASDAQ:ZS).

What does smart money think about Zscaler, Inc. (NASDAQ:ZS)?

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 30% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZS over the last 20 quarters. So, let’s review 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, D E Shaw, managed by D. E. Shaw, holds the most valuable position in Zscaler, Inc. (NASDAQ:ZS). D E Shaw has a $229.7 million position in the stock, comprising 0.3% of its 13F portfolio. The second most bullish fund manager is Citadel Investment Group, led by Ken Griffin, holding a $72.7 million call position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors that are bullish contain Ken Griffin’s Citadel Investment Group, John Overdeck and David Siegel’s Two Sigma Advisors and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position Cota Capital allocated the biggest weight to Zscaler, Inc. (NASDAQ:ZS), around 8.95% of its 13F portfolio. Mark Asset Management is also relatively very bullish on the stock, designating 2.28 percent of its 13F equity portfolio to ZS.

As aggregate interest increased, key hedge funds were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the biggest position in Zscaler, Inc. (NASDAQ:ZS). Arrowstreet Capital had $58.2 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $19 million position during the quarter. The other funds with brand new ZS positions are Highbridge Capital Management, Richard Driehaus’s Driehaus Capital, and David Harding’s Winton Capital Management.

Let’s go over hedge fund activity in other stocks similar to Zscaler, Inc. (NASDAQ:ZS). We will take a look at Kansas City Southern (NYSE:KSU), Jack Henry & Associates, Inc. (NASDAQ:JKHY), Roku, Inc. (NASDAQ:ROKU), Boston Properties, Inc. (NYSE:BXP), EPAM Systems Inc (NYSE:EPAM), Teradyne, Inc. (NASDAQ:TER), and Dover Corporation (NYSE:DOV). This group of stocks’ market caps are closest to ZS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.7 hedge funds with bullish positions and the average amount invested in these stocks was $613 million. That figure was $642 million in ZS’s case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand EPAM Systems Inc (NYSE:EPAM) is the least popular one with only 28 bullish hedge fund positions. Zscaler, Inc. (NASDAQ:ZS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ZS is 58.4. 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% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on ZS as the stock returned 24% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.

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