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Were Hedge Funds Right About Piling Into Paychex, Inc. (PAYX)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Paychex, Inc. (NASDAQ:PAYX) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Paychex, Inc. (NASDAQ:PAYX) a buy here? Prominent investors were betting on the stock. The number of bullish hedge fund bets increased by 5 recently. Our calculations also showed that PAYX 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). PAYX was in 41 hedge funds’ portfolios at the end of March. There were 36 hedge funds in our database with PAYX holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Greenlight Capital

David Einhorn of Greenlight Capital

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 latest hedge fund action encompassing Paychex, Inc. (NASDAQ:PAYX).

What have hedge funds been doing with Paychex, Inc. (NASDAQ:PAYX)?

Heading into the second quarter of 2020, a total of 41 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 14% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in PAYX a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Select Equity Group, managed by Robert Joseph Caruso, holds the number one position in Paychex, Inc. (NASDAQ:PAYX). Select Equity Group has a $323.6 million position in the stock, comprising 2.2% of its 13F portfolio. The second largest stake is held by Echo Street Capital Management, led by Greg Poole, holding a $56.6 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions consist of D. E. Shaw’s D E Shaw, Israel Englander’s Millennium Management and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Select Equity Group allocated the biggest weight to Paychex, Inc. (NASDAQ:PAYX), around 2.23% of its 13F portfolio. Hourglass Capital is also relatively very bullish on the stock, earmarking 2.1 percent of its 13F equity portfolio to PAYX.

Now, key hedge funds were leading the bulls’ herd. Renaissance Technologies, assembled the most valuable position in Paychex, Inc. (NASDAQ:PAYX). Renaissance Technologies had $13.2 million invested in the company at the end of the quarter. David Einhorn’s Greenlight Capital also initiated a $11.6 million position during the quarter. The other funds with new positions in the stock are Peter Seuss’s Prana Capital Management, Greg Eisner’s Engineers Gate Manager, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s go over hedge fund activity in other stocks similar to Paychex, Inc. (NASDAQ:PAYX). We will take a look at O’Reilly Automotive Inc (NASDAQ:ORLY), KLA Corporation (NASDAQ:KLAC), Spotify Technology S.A. (NYSE:SPOT), and Agilent Technologies Inc. (NYSE:A). This group of stocks’ market values are closest to PAYX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ORLY 60 2486584 -4
KLAC 26 382931 -4
SPOT 40 1124522 2
A 35 2667892 -11
Average 40.25 1665482 -4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $1665 million. That figure was $643 million in PAYX’s case. O’Reilly Automotive Inc (NASDAQ:ORLY) is the most popular stock in this table. On the other hand KLA Corporation (NASDAQ:KLAC) is the least popular one with only 26 bullish hedge fund positions. Paychex, Inc. (NASDAQ:PAYX) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on PAYX, though not to the same extent, as the stock returned 21.6% during the second quarter and outperformed the market as well.

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