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Smart Money Nailed Applied Optoelectronics Inc (AAOI) As Shares Soar Following Big Guidance Surprise For Investors

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Applied Optoelectronics Inc (NASDAQ:AAOI) rose more than 23% earlier today and reached a new 52-week high following a hike in the company’s second quarter guidance by management this morning. Shares ended the day up by 18.04%. Second quarter non-GAAP earnings per share are now expected to fall between $0.36 and $0.38 compared to the earlier outlook of $0.25 to $0.30, representing a significant hike of as much as 50% from the previous low-end to the new top-end of the guidance range. Analysts expected the company to hit around the previous guidance’s mid-point, predicting $0.27. Applied Optoelectronics Inc (NASDAQ:AAOI) is scheduled to release its financial results for the second quarter on August 5. Even before today, the stock of the $26.41 million provider of fiber-optic networking products had posted gains of over 50% this year. It has certainly been a high performer for the semiconductor industry, which has only risen by about 8% in comparison, during the same time period. Applied Optoelectronics Inc (NASDAQ:AAOI)’s financial results for the first quarter on the other hand missed expectations. The $0.02 EPS was less than the anticipated $0.09, while revenues of $30.23 million fell short by $1.64 million.


The smart money tracked by Insider Monkey was very bullish on the company during the first quarter of the year, which may have signaled to investors that the best money managers in the world saw improved operations and performance like this coming. Among the investment firms that we track, 13 funds had an aggregate investment of $132.14 million in Applied Optoelectronics Inc (NASDAQ:AAOI) at the end of March, compared to ten firms with just $21.36 million in holdings at the end of last year. While shares had a strong first quarter, gaining over 23%, that doesn’t nearly account for the greater than 520% increase in the holdings of the smart money. They were right on the money, as shares have gained another 43.8% since the end of the first quarter.

First a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to less than 55% for the S&P 500 (see the details).

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