Were Hedge Funds Right About Embracing Nuance Communications Inc. (NUAN)?

In this article we will check out the progression of hedge fund sentiment towards Nuance Communications Inc. (NASDAQ:NUAN) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Nuance Communications Inc. (NASDAQ:NUAN) has seen an increase in support from the world’s most elite money managers in recent months. Nuance Communications Inc. (NASDAQ:NUAN) was in 44 hedge funds’ portfolios at the end of June. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 42 hedge funds in our database with NUAN holdings at the end of March. Our calculations also showed that NUAN 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.

In the financial world there are a large number of tools stock traders put to use to appraise their stock investments. A couple of the most innovative tools are hedge fund and insider trading sentiment. We have shown that, historically, those who follow the best picks of the best investment managers can outclass their index-focused peers by a superb margin (see the details here).

Keeping this in mind we’re going to analyze the recent hedge fund action surrounding Nuance Communications Inc. (NASDAQ:NUAN).

How are hedge funds trading Nuance Communications Inc. (NASDAQ:NUAN)?

At the end of the second quarter, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NUAN over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Among these funds, Viking Global held the most valuable stake in Nuance Communications Inc. (NASDAQ:NUAN), which was worth $323.9 million at the end of the third quarter. On the second spot was Eminence Capital which amassed $265.3 million worth of shares. Southpoint Capital Advisors, RGM Capital, and Glenview Capital 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 Shelter Haven Capital Management allocated the biggest weight to Nuance Communications Inc. (NASDAQ:NUAN), around 11.72% of its 13F portfolio. RGM Capital is also relatively very bullish on the stock, designating 8.57 percent of its 13F equity portfolio to NUAN.

As aggregate interest increased, specific money managers were breaking ground themselves. Viking Global, managed by Andreas Halvorsen, established the most valuable position in Nuance Communications Inc. (NASDAQ:NUAN). Viking Global had $323.9 million invested in the company at the end of the quarter. Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management also made a $106.4 million investment in the stock during the quarter. The other funds with brand new NUAN positions are Gabriel Plotkin’s Melvin Capital Management, Scott Ferguson’s Sachem Head Capital, and Leon Shaulov’s Maplelane Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Nuance Communications Inc. (NASDAQ:NUAN) but similarly valued. These stocks are The Toro Company (NYSE:TTC), Lincoln National Corporation (NYSE:LNC), Bill.com Holdings, Inc. (NYSE:BILL), Knight-Swift Transportation Holdings Inc. (NYSE:KNX), Bright Horizons Family Solutions Inc (NYSE:BFAM), Huntington Ingalls Industries Inc (NYSE:HII), and Universal Display Corporation (NASDAQ:OLED). All of these stocks’ market caps are closest to NUAN’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.4 hedge funds with bullish positions and the average amount invested in these stocks was $509 million. That figure was $1828 million in NUAN’s case. Bill.com Holdings, Inc. (NYSE:BILL) is the most popular stock in this table. On the other hand Universal Display Corporation (NASDAQ:OLED) is the least popular one with only 25 bullish hedge fund positions. Nuance Communications Inc. (NASDAQ:NUAN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NUAN is 72.2. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on NUAN as the stock returned 35.5% since the end of Q2 (through 10/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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