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Were Hedge Funds Right About RingCentral Inc (RNG)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding RingCentral Inc (NYSE:RNG).

Is RingCentral Inc (NYSE:RNG) undervalued? Money managers are getting more bullish. The number of bullish hedge fund bets advanced by 10 in recent months. Our calculations also showed that RNG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). RNG was in 62 hedge funds’ portfolios at the end of December. There were 52 hedge funds in our database with RNG positions at the end of the previous quarter.

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 41 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.

COATUE MANAGEMENT

Philippe Laffont of Coatue Management

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. Federal Reserve and Central Banks all around world are printing money like there is no tomorrow, so we check out this this precious metals expert’s stock pick. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to analyze the latest hedge fund action regarding RingCentral Inc (NYSE:RNG).

How are hedge funds trading RingCentral Inc (NYSE:RNG)?

At the end of the fourth quarter, a total of 62 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 19% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in RNG over the last 18 quarters. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Tiger Global Management LLC, managed by Chase Coleman, holds the number one position in RingCentral Inc (NYSE:RNG). Tiger Global Management LLC has a $556.1 million position in the stock, comprising 3.1% of its 13F portfolio. The second largest stake is held by Philippe Laffont of Coatue Management, with a $360 million position; the fund has 2.9% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish consist of Panayotis Takis Sparaggis’s Alkeon Capital Management, Christopher Lyle’s SCGE Management and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Stamina Capital Management allocated the biggest weight to RingCentral Inc (NYSE:RNG), around 11.93% of its 13F portfolio. Hunt Lane Capital is also relatively very bullish on the stock, earmarking 9.94 percent of its 13F equity portfolio to RNG.

Consequently, specific money managers have jumped into RingCentral Inc (NYSE:RNG) headfirst. Adage Capital Management, managed by Phill Gross and Robert Atchinson, assembled the most outsized position in RingCentral Inc (NYSE:RNG). Adage Capital Management had $27.8 million invested in the company at the end of the quarter. David Fiszel’s Honeycomb Asset Management also initiated a $21.1 million position during the quarter. The other funds with brand new RNG positions are Christopher Weldon’s Stamina Capital Management, Gregg Moskowitz’s Interval Partners, and Bobby Yazdani and Babak Poushanchi’s Cota Capital.

Let’s go over hedge fund activity in other stocks similar to RingCentral Inc (NYSE:RNG). These stocks are Genmab A/S (NASDAQ:GMAB), Ulta Beauty, Inc. (NASDAQ:ULTA), Hasbro, Inc. (NASDAQ:HAS), and Citrix Systems, Inc. (NASDAQ:CTXS). This group of stocks’ market values are similar to RNG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GMAB 12 107919 1
ULTA 41 1245257 0
HAS 36 523095 4
CTXS 34 1513753 3
Average 30.75 847506 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $848 million. That figure was $2456 million in RNG’s case. Ulta Beauty, Inc. (NASDAQ:ULTA) is the most popular stock in this table. On the other hand Genmab A/S (NASDAQ:GMAB) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks RingCentral Inc (NYSE:RNG) 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 lost 1.0% in 2020 through April 20th but still managed to beat the market by 11 percentage points. Hedge funds were also right about betting on RNG as the stock returned 50.1% so far in 2020 (through April 20th) 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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