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Were Hedge Funds Right About Zuora, Inc. (ZUO)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether Zuora, Inc. (NYSE:ZUO) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Hedge fund interest in Zuora, Inc. (NYSE:ZUO) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare ZUO to other stocks including LGI Homes Inc (NASDAQ:LGIH), The RealReal, Inc. (NASDAQ:REAL), and Tronox Limited (NYSE:TROX) to get a better sense of its popularity.

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 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 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. 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 let’s take a look at the new hedge fund action encompassing Zuora, Inc. (NYSE:ZUO).

What have hedge funds been doing with Zuora, Inc. (NYSE:ZUO)?

Heading into the first quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in ZUO a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Amish Mehta’s SQN Investors has the biggest position in Zuora, Inc. (NYSE:ZUO), worth close to $45.4 million, amounting to 4.2% of its total 13F portfolio. Coming in second is Bares Capital Management, managed by Brian Bares, which holds a $43.3 million position; 1.2% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions encompass Steve Cohen’s Point72 Asset Management, Greg Poole’s Echo Street Capital Management and Constantinos J. Christofilis’s Archon Capital Management. In terms of the portfolio weights assigned to each position SQN Investors allocated the biggest weight to Zuora, Inc. (NYSE:ZUO), around 4.19% of its 13F portfolio. Potrero Capital Research is also relatively very bullish on the stock, setting aside 3.16 percent of its 13F equity portfolio to ZUO.

Due to the fact that Zuora, Inc. (NYSE:ZUO) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there exists a select few money managers who sold off their entire stakes by the end of the third quarter. Interestingly, Colin Moran’s Abdiel Capital Advisors dumped the biggest investment of all the hedgies followed by Insider Monkey, totaling close to $20.5 million in stock. Panayotis Takis Sparaggis’s fund, Alkeon Capital Management, also sold off its stock, about $15.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Zuora, Inc. (NYSE:ZUO) but similarly valued. These stocks are LGI Homes Inc (NASDAQ:LGIH), The RealReal, Inc. (NASDAQ:REAL), Tronox Holdings plc (NYSE:TROX), and Cardlytics, Inc. (NASDAQ:CDLX). This group of stocks’ market caps are similar to ZUO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LGIH 13 66254 -2
REAL 13 153969 -8
TROX 23 138148 3
CDLX 26 438746 7
Average 18.75 199279 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $199 million. That figure was $161 million in ZUO’s case. Cardlytics, Inc. (NASDAQ:CDLX) is the most popular stock in this table. On the other hand LGI Homes Inc (NASDAQ:LGIH) is the least popular one with only 13 bullish hedge fund positions. Zuora, Inc. (NYSE:ZUO) 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately ZUO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ZUO were disappointed as the stock returned -38.7% 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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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