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 Bill.com Holdings, Inc. (NYSE:BILL) and determine whether hedge funds had an edge regarding this stock.
Is Bill.com Holdings, Inc. (NYSE:BILL) an excellent investment right now? The smart money was buying. The number of long hedge fund positions advanced by 30 recently. Bill.com Holdings, Inc. (NYSE:BILL) was in 52 hedge funds' portfolios at the end of June. This is the new all time high for this statistics. Our calculations also showed that BILL isn't among the 30 most popular stocks among hedge funds (click for Q2 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 56 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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Gabriel Plotkin Melvin Capital Management
Gabriel Plotkin of Melvin Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we're going to view the key hedge fund action regarding Bill.com Holdings, Inc. (NYSE:BILL).
What have hedge funds been doing with Bill.com Holdings, Inc. (NYSE:BILL)?
At the end of June, a total of 52 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 136% from the first quarter of 2020. By comparison, 0 hedge funds held shares or bullish call options in BILL a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
The largest stake in Bill.com Holdings, Inc. (NYSE:BILL) was held by Abdiel Capital Advisors, which reported holding $260 million worth of stock at the end of September. It was followed by Napier Park Global Capital with a $248.8 million position. Other investors bullish on the company included Whale Rock Capital Management, Echo Street Capital Management, and Engle Capital. In terms of the portfolio weights assigned to each position Napier Park Global Capital allocated the biggest weight to Bill.com Holdings, Inc. (NYSE:BILL), around 99.39% of its 13F portfolio. 3G Capital is also relatively very bullish on the stock, earmarking 18.22 percent of its 13F equity portfolio to BILL.
Consequently, key hedge funds were breaking ground themselves. Castle Hook Partners, managed by Josh Donfeld and David Rogers, established the most outsized position in Bill.com Holdings, Inc. (NYSE:BILL). Castle Hook Partners had $39.1 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also initiated a $35.9 million position during the quarter. The other funds with new positions in the stock are Gabriel Plotkin's Melvin Capital Management, Neal Nathani and Darren Dinneen's Totem Point Management, and Anand Parekh's Alyeska Investment Group.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Bill.com Holdings, Inc. (NYSE:BILL) but similarly valued. These stocks are Knight-Swift Transportation Holdings Inc. (NYSE:KNX), Bright Horizons Family Solutions Inc (NYSE:BFAM), Huntington Ingalls Industries Inc (NYSE:HII), Universal Display Corporation (NASDAQ:OLED), XPO Logistics Inc (NYSE:XPO), News Corp (NASDAQ:NWS), and The New York Times Company (NYSE:NYT). This group of stocks' market caps are closest to BILL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KNX,39,466487,7 BFAM,30,217350,3 HII,30,272167,9 OLED,25,216895,1 XPO,40,2294370,4 NWS,16,32230,3 NYT,42,1853275,9 Average,31.7,764682,5.1 [/table]
As you can see these stocks had an average of 31.7 hedge funds with bullish positions and the average amount invested in these stocks was $765 million. That figure was $1197 million in BILL's case. The New York Times Company (NYSE:NYT) is the most popular stock in this table. On the other hand News Corp (NASDAQ:NWS) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Bill.com Holdings, Inc. (NYSE:BILL) is more popular among hedge funds. Our overall hedge fund sentiment score for BILL is 86.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately BILL wasn't nearly as popular as these 10 stocks and hedge funds that were betting on BILL were disappointed as the stock returned 9.7% since the end of the second quarter 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 most of these stocks already outperformed the market in 2020.
