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Were Hedge Funds Right About Zscaler, Inc. (ZS)?

The latest 13F reporting period has come and gone, and 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. Now, 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 you are going to find out whether hedge funds thoughtZscaler, Inc. (NASDAQ:ZS) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Zscaler, Inc. (NASDAQ:ZS) a bargain? Hedge funds were turning bullish. The number of bullish hedge fund bets advanced by 9 lately. Our calculations also showed that ZS 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was 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’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.

Steven Cohen

Steven Cohen of Point72 Asset 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to view the new hedge fund action surrounding Zscaler, Inc. (NASDAQ:ZS).

How have hedgies been trading Zscaler, Inc. (NASDAQ:ZS)?

Heading into the second quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 50% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZS over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Alex Sacerdote’s Whale Rock Capital Management has the largest position in Zscaler, Inc. (NASDAQ:ZS), worth close to $122.2 million, comprising 1.7% of its total 13F portfolio. On Whale Rock Capital Management’s heels is Ken Griffin of Citadel Investment Group, with a $41.1 million call position; less than 0.1%% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors with similar optimism encompass John Overdeck and David Siegel’s Two Sigma Advisors, Steve Cohen’s Point72 Asset Management and Bobby Yazdani and Babak Poushanchi’s Cota Capital. In terms of the portfolio weights assigned to each position Cota Capital allocated the biggest weight to Zscaler, Inc. (NASDAQ:ZS), around 10.5% of its 13F portfolio. Stony Point Capital is also relatively very bullish on the stock, earmarking 6.38 percent of its 13F equity portfolio to ZS.

With a general bullishness amongst the heavyweights, some big names have jumped into Zscaler, Inc. (NASDAQ:ZS) headfirst. Whale Rock Capital Management, managed by Alex Sacerdote, assembled the largest position in Zscaler, Inc. (NASDAQ:ZS). Whale Rock Capital Management had $122.2 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $21.4 million position during the quarter. The following funds were also among the new ZS investors: D. E. Shaw’s D E Shaw, Joseph Samuels’s Islet Management, and Josh Goldberg’s G2 Investment Partners Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Zscaler, Inc. (NASDAQ:ZS) but similarly valued. These stocks are Everest Re Group Ltd (NYSE:RE), MGM Growth Properties LLC (NYSE:MGP), MongoDB, Inc. (NASDAQ:MDB), and United Airlines Holdings Inc (NASDAQ:UAL). This group of stocks’ market values match ZS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RE 27 558232 3
MGP 28 546863 -1
MDB 30 770189 -2
UAL 41 1908897 -21
Average 31.5 946045 -5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $946 million. That figure was $275 million in ZS’s case. United Airlines Holdings Inc (NASDAQ:UAL) is the most popular stock in this table. On the other hand Everest Re Group Ltd (NYSE:RE) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Zscaler, Inc. (NASDAQ:ZS) is even less popular than RE. Hedge funds clearly dropped the ball on ZS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on ZS as the stock returned 79.9% in the second quarter and outperformed the market by an even larger margin.

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