Were Hedge Funds Right About Loading Up On Tyler Technologies, Inc. (TYL)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Tyler Technologies, Inc. (NYSE:TYL).

Tyler Technologies, Inc. (NYSE:TYL) investors should pay attention to an increase in hedge fund interest recently. Tyler Technologies, Inc. (NYSE:TYL) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 31. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 30 hedge funds in our database with TYL positions at the end of the first quarter. Our calculations also showed that TYL 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.

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 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 we’re going to take a look at the latest hedge fund action surrounding Tyler Technologies, Inc. (NYSE:TYL).

How are hedge funds trading Tyler Technologies, Inc. (NYSE:TYL)?

At second quarter’s end, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TYL 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.

The largest stake in Tyler Technologies, Inc. (NYSE:TYL) was held by Praesidium Investment Management Company, which reported holding $102.2 million worth of stock at the end of June. It was followed by RGM Capital with a $65.6 million position. Other investors bullish on the company included Select Equity Group, Millennium Management, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Praesidium Investment Management Company allocated the biggest weight to Tyler Technologies, Inc. (NYSE:TYL), around 6.64% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, designating 4.06 percent of its 13F equity portfolio to TYL.

Consequently, some big names were breaking ground themselves. Select Equity Group, managed by Robert Joseph Caruso, created the biggest position in Tyler Technologies, Inc. (NYSE:TYL). Select Equity Group had $57.1 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also initiated a $15.4 million position during the quarter. The other funds with brand new TYL positions are Blair Baker’s Precept Capital Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Greg Eisner’s Engineers Gate Manager.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Tyler Technologies, Inc. (NYSE:TYL) but similarly valued. These stocks are ONEOK, Inc. (NYSE:OKE), Pembina Pipeline Corp (NYSE:PBA), Fifth Third Bancorp (NASDAQ:FITB), Ventas, Inc. (NYSE:VTR), Zebra Technologies Corporation (NASDAQ:ZBRA), Teva Pharmaceutical Industries Limited (NYSE:TEVA), and Nomura Holdings, Inc. (NYSE:NMR). This group of stocks’ market values are similar to TYL’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.1 hedge funds with bullish positions and the average amount invested in these stocks was $403 million. That figure was $534 million in TYL’s case. Zebra Technologies Corporation (NASDAQ:ZBRA) is the most popular stock in this table. On the other hand Nomura Holdings, Inc. (NYSE:NMR) is the least popular one with only 5 bullish hedge fund positions. Tyler Technologies, Inc. (NYSE:TYL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TYL is 87. 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. Hedge funds were also right about betting on TYL as the stock returned 10.8% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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