Were Hedge Funds Right About Piling Into Change Healthcare Inc. (CHNG)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Change Healthcare Inc. (NASDAQ:CHNG) and determine whether the smart money was really smart about this stock.

Change Healthcare Inc. (NASDAQ:CHNG) investors should be aware of an increase in hedge fund sentiment in recent months. CHNG was in 47 hedge funds’ portfolios at the end of the first quarter of 2020. There were 25 hedge funds in our database with CHNG holdings at the end of the previous quarter. Our calculations also showed that CHNG isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the recent hedge fund action surrounding Change Healthcare Inc. (NASDAQ:CHNG).

How have hedgies been trading Change Healthcare Inc. (NASDAQ:CHNG)?

At the end of the first quarter, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 88% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CHNG over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Camber Capital Management held the most valuable stake in Change Healthcare Inc. (NASDAQ:CHNG), which was worth $129.9 million at the end of the third quarter. On the second spot was Viking Global which amassed $127.6 million worth of shares. Park West Asset Management, Eminence Capital, and Citadel Investment Group 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 Harspring Capital Management allocated the biggest weight to Change Healthcare Inc. (NASDAQ:CHNG), around 15.12% of its 13F portfolio. Simcoe Capital Management is also relatively very bullish on the stock, dishing out 8.37 percent of its 13F equity portfolio to CHNG.

As aggregate interest increased, some big names were breaking ground themselves. Camber Capital Management, managed by Stephen DuBois, established the biggest position in Change Healthcare Inc. (NASDAQ:CHNG). Camber Capital Management had $129.9 million invested in the company at the end of the quarter. Andreas Halvorsen’s Viking Global also initiated a $127.6 million position during the quarter. The other funds with brand new CHNG positions are Ricky Sandler’s Eminence Capital, David Einhorn’s Greenlight Capital, and Amy Minella’s Cardinal Capital.

Let’s go over hedge fund activity in other stocks similar to Change Healthcare Inc. (NASDAQ:CHNG). We will take a look at Nutanix, Inc. (NASDAQ:NTNX), Mattel, Inc. (NASDAQ:MAT), FibroGen Inc (NASDAQ:FGEN), and Unum Group (NYSE:UNM). All of these stocks’ market caps are similar to CHNG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $340 million. That figure was $1054 million in CHNG’s case. Nutanix, Inc. (NASDAQ:NTNX) is the most popular stock in this table. On the other hand Mattel, Inc. (NASDAQ:MAT) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Change Healthcare Inc. (NASDAQ:CHNG) is more popular among hedge funds. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately CHNG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CHNG were disappointed as the stock returned 12.1% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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