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Were Hedge Funds Right About Souring On Virtusa Corporation (VRTU)?

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 Virtusa Corporation (NASDAQ:VRTU) and determine whether hedge funds had an edge regarding this stock.

Virtusa Corporation (NASDAQ:VRTU) investors should be aware of a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that VRTU 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.

Today there are a large number of methods shareholders have at their disposal to assess stocks. Two of the less known methods are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the best picks of the best money managers can outperform the market by a healthy amount (see the details here).

David Brown Hawk Ridge Partners

David Brown of Hawk Ridge Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 go over the recent hedge fund action encompassing Virtusa Corporation (NASDAQ:VRTU).

How are hedge funds trading Virtusa Corporation (NASDAQ:VRTU)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in VRTU 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, Hawk Ridge Management held the most valuable stake in Virtusa Corporation (NASDAQ:VRTU), which was worth $16.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $8.1 million worth of shares. P.A.W. CAPITAL PARTNERS, Millennium Management, 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 P.A.W. CAPITAL PARTNERS allocated the biggest weight to Virtusa Corporation (NASDAQ:VRTU), around 3.06% of its 13F portfolio. Hawk Ridge Management is also relatively very bullish on the stock, setting aside 2.82 percent of its 13F equity portfolio to VRTU.

Due to the fact that Virtusa Corporation (NASDAQ:VRTU) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there were a few money managers who were dropping their full holdings by the end of the first quarter. It’s worth mentioning that George McCabe’s Portolan Capital Management said goodbye to the largest position of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $10.3 million in stock. Michael Gelband’s fund, ExodusPoint Capital, also dropped its stock, about $0.4 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 1 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Virtusa Corporation (NASDAQ:VRTU) but similarly valued. These stocks are PBF Energy Inc (NYSE:PBF), DCP Midstream LP (NYSE:DCP), Cango Inc. (NYSE:CANG), and 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS). This group of stocks’ market values resemble VRTU’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PBF 22 70769 -10
DCP 4 7421 -2
CANG 1 212 0
FLWS 19 60482 4
Average 11.5 34721 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $36 million in VRTU’s case. PBF Energy Inc (NYSE:PBF) is the most popular stock in this table. On the other hand Cango Inc. (NYSE:CANG) is the least popular one with only 1 bullish hedge fund positions. Virtusa Corporation (NASDAQ:VRTU) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately VRTU wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VRTU were disappointed as the stock returned 12.3% during the same time period 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 many of these stocks already outperformed the market so far this year.

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