Zuora, Inc. (ZUO): Hedge Funds Taking Some Chips Off The Table

In this article we will take a look at whether hedge funds think 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.

Zuora, Inc. (NYSE:ZUO) was in 23 hedge funds’ portfolios at the end of the first quarter of 2020. ZUO investors should be aware of a decrease in hedge fund sentiment of late. There were 26 hedge funds in our database with ZUO positions at the end of the previous quarter. Our calculations also showed that ZUO 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 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 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 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.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the 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 check out the key hedge fund action encompassing Zuora, Inc. (NYSE:ZUO).

Hedge fund activity in Zuora, Inc. (NYSE:ZUO)

At Q1’s end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in ZUO a year ago. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

More specifically, Hound Partners was the largest shareholder of Zuora, Inc. (NYSE:ZUO), with a stake worth $27.3 million reported as of the end of September. Trailing Hound Partners was SQN Investors, which amassed a stake valued at $25.9 million. Bares Capital Management, Renaissance Technologies, 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 SQN Investors allocated the biggest weight to Zuora, Inc. (NYSE:ZUO), around 2.62% of its 13F portfolio. Hound Partners is also relatively very bullish on the stock, designating 2.55 percent of its 13F equity portfolio to ZUO.

Since Zuora, Inc. (NYSE:ZUO) has witnessed a decline in interest from hedge fund managers, it’s easy to see that there were a few hedge funds who were dropping their full holdings heading into Q4. Intriguingly, Greg Poole’s Echo Street Capital Management dropped the largest position of the 750 funds followed by Insider Monkey, worth an estimated $10.2 million in stock, and Constantinos J. Christofilis’s Archon Capital Management was right behind this move, as the fund cut about $7.9 million worth. These moves are important to note, as total hedge fund interest was cut by 3 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Zuora, Inc. (NYSE:ZUO) but similarly valued. We will take a look at Scientific Games Corp (NASDAQ:SGMS), Trupanion Inc (NASDAQ:TRUP), Covetrus, Inc. (NASDAQ:CVET), and TriCo Bancshares (NASDAQ:TCBK). This group of stocks’ market values match ZUO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SGMS 22 226145 -11
TRUP 13 140895 0
CVET 22 114918 2
TCBK 10 30127 -1
Average 16.75 128021 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $128 million. That figure was $103 million in ZUO’s case. Scientific Games Corp (NASDAQ:SGMS) is the most popular stock in this table. On the other hand TriCo Bancshares (NASDAQ:TCBK) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Zuora, Inc. (NYSE:ZUO) 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 returned 13.9% in 2020 through June 10th but still managed to beat the market by 14.2 percentage points. Hedge funds were also right about betting on ZUO as the stock returned 59% so far in Q2 (through June 10th) 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.

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