Did Hedge Funds Drop The Ball On Guidewire Software Inc (GWRE) ?

Nina Todic

Sat, Apr 20, 2019, 6:25 PM

During the fourth quarter the Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 7 percentage points as investors worried over the possible ramifications of rising interest rates. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Guidewire Software Inc (NYSE:GWRE) and see how the stock is affected by the recent hedge fund activity.

Guidewire Software Inc (NYSE:GWRE) was in 20 hedge funds' portfolios at the end of the fourth quarter of 2018. GWRE shareholders have witnessed a decrease in hedge fund sentiment lately. There were 32 hedge funds in our database with GWRE positions at the end of the previous quarter. Our calculations also showed that GWRE isn't among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

Let's check out the recent hedge fund action encompassing Guidewire Software Inc (NYSE:GWRE).

What does the smart money think about Guidewire Software Inc (NYSE:GWRE)?

At Q4's end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -38% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in GWRE a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D1 Capital Partners held the most valuable stake in Guidewire Software Inc (NYSE:GWRE), which was worth $238.3 million at the end of the third quarter. On the second spot was Stockbridge Partners which amassed $164.9 million worth of shares. Moreover, Renaissance Technologies, Bares Capital Management, and Shannon River Fund Management were also bullish on Guidewire Software Inc (NYSE:GWRE), allocating a large percentage of their portfolios to this stock.

Due to the fact that Guidewire Software Inc (NYSE:GWRE) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there was a specific group of money managers that decided to sell off their full holdings last quarter. At the top of the heap, Zach Schreiber's Point State Capital cut the biggest position of the 700 funds tracked by Insider Monkey, worth an estimated $82.1 million in stock, and Christopher James's Partner Fund Management was right behind this move, as the fund said goodbye to about $41.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 12 funds last quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Guidewire Software Inc (NYSE:GWRE) but similarly valued. These stocks are Neurocrine Biosciences, Inc. (NASDAQ:NBIX), Bright Horizons Family Solutions Inc (NYSE:BFAM), Ingredion Inc (NYSE:INGR), and Bausch Health Companies Inc.(NYSE:BHC). This group of stocks' market caps match GWRE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NBIX,37,781900,-2 BFAM,16,279164,0 INGR,21,235894,0 BHC,32,1348483,2 Average,26.5,661360,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $661 million. That figure was $565 million in GWRE's case. Neurocrine Biosciences, Inc. (NASDAQ:NBIX) is the most popular stock in this table. On the other hand Bright Horizons Family Solutions Inc (NYSE:BFAM) is the least popular one with only 16 bullish hedge fund positions. Guidewire Software Inc (NYSE:GWRE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Hedge funds were also right about betting on GWRE as the stock returned 24.8% and outperformed the market as well.

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

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