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

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Nuance Communications Inc. (NASDAQ:NUAN) and determine whether hedge funds skillfully traded this stock.

Is Nuance Communications Inc. (NASDAQ:NUAN) ready to rally soon? Prominent investors were becoming hopeful. The number of bullish hedge fund positions improved by 3 recently. Our calculations also showed that NUAN 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). NUAN was in 42 hedge funds’ portfolios at the end of March. There were 39 hedge funds in our database with NUAN holdings at the end of the previous quarter.

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 58 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.

Justin John Ferayorni - Tamarack Capital Management

Justin John Ferayorni of Tamarack Capital Management

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 we’re going to view the fresh hedge fund action encompassing Nuance Communications Inc. (NASDAQ:NUAN).

How have hedgies been trading Nuance Communications Inc. (NASDAQ:NUAN)?

Heading into the second quarter of 2020, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the fourth quarter of 2019. By comparison, 28 hedge funds held shares or bullish call options in NUAN a year ago. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

More specifically, Southpoint Capital Advisors was the largest shareholder of Nuance Communications Inc. (NASDAQ:NUAN), with a stake worth $117.5 million reported as of the end of September. Trailing Southpoint Capital Advisors was RGM Capital, which amassed a stake valued at $108.2 million. Glenview Capital, Park West Asset Management, and Brahman 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 RGM Capital allocated the biggest weight to Nuance Communications Inc. (NASDAQ:NUAN), around 8.5% of its 13F portfolio. Brahman Capital is also relatively very bullish on the stock, setting aside 7.69 percent of its 13F equity portfolio to NUAN.

As industrywide interest jumped, some big names were leading the bulls’ herd. Southpoint Capital Advisors, managed by John Smith Clark, created the largest position in Nuance Communications Inc. (NASDAQ:NUAN). Southpoint Capital Advisors had $117.5 million invested in the company at the end of the quarter. Ricky Sandler’s Eminence Capital also initiated a $49.3 million position during the quarter. The following funds were also among the new NUAN investors: Justin John Ferayorni’s Tamarack Capital Management, Mark Coe’s Intrinsic Edge Capital, and Jerry Kochanski’s Shelter Haven Capital Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Nuance Communications Inc. (NASDAQ:NUAN) but similarly valued. We will take a look at AECOM (NYSE:ACM), Paylocity Holding Corp (NASDAQ:PCTY), GFL Environmental Inc. (NYSE:GFL), and Five9 Inc (NASDAQ:FIVN). This group of stocks’ market valuations resemble NUAN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ACM 39 670829 3
PCTY 33 409592 7
GFL 10 150736 10
FIVN 33 715609 -2
Average 28.75 486692 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $487 million. That figure was $765 million in NUAN’s case. AECOM (NYSE:ACM) is the most popular stock in this table. On the other hand GFL Environmental Inc. (NYSE:GFL) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Nuance Communications Inc. (NASDAQ:NUAN) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on NUAN as the stock returned 50.8% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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