Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Paycom Software Inc (NYSE:PAYC)? The smart money sentiment can provide an answer to this question.
Paycom Software Inc (NYSE:PAYC) investors should be aware of an increase in hedge fund interest of late. Paycom Software Inc (NYSE:PAYC) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that PAYC 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 investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
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 let’s take a glance at the fresh hedge fund action surrounding Paycom Software Inc (NYSE:PAYC).
How have hedgies been trading Paycom Software Inc (NYSE:PAYC)?
At Q2’s end, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the first quarter of 2020. On the other hand, there were a total of 24 hedge funds with a bullish position in PAYC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Citadel Investment Group held the most valuable stake in Paycom Software Inc (NYSE:PAYC), which was worth $84 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $74.7 million worth of shares. Hitchwood Capital Management, SQN Investors, and Arrowstreet 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 SQN Investors allocated the biggest weight to Paycom Software Inc (NYSE:PAYC), around 3.49% of its 13F portfolio. Hitchwood Capital Management is also relatively very bullish on the stock, earmarking 2.17 percent of its 13F equity portfolio to PAYC.
Consequently, key money managers have been driving this bullishness. Hitchwood Capital Management, managed by James Crichton, created the most valuable position in Paycom Software Inc (NYSE:PAYC). Hitchwood Capital Management had $46.5 million invested in the company at the end of the quarter. Amish Mehta’s SQN Investors also initiated a $45.1 million position during the quarter. The other funds with new positions in the stock are Anand Parekh’s Alyeska Investment Group, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Paycom Software Inc (NYSE:PAYC) but similarly valued. These stocks are Yum China Holdings, Inc. (NYSE:YUMC), DISH Network Corp. (NASDAQ:DISH), Chewy, Inc. (NYSE:CHWY), Delta Air Lines, Inc. (NYSE:DAL), Fortis Inc. (NYSE:FTS), PG&E Corporation (NYSE:PCG), and Slack Technologies Inc (NYSE:WORK). This group of stocks’ market caps resemble PAYC’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 43.4 hedge funds with bullish positions and the average amount invested in these stocks was $1359 million. That figure was $504 million in PAYC’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 8 bullish hedge fund positions. Paycom Software Inc (NYSE:PAYC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PAYC is 56.7. 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 PAYC as the stock returned 17.6% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.