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2019 Review: Top Hedge Fund Stocks vs. NetEase, Inc (NTES)

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves. In this article, we look at what those funds think of NetEase, Inc (NASDAQ:NTES) based on that data.

Is NetEase, Inc (NASDAQ:NTES) ready to rally soon? The best stock pickers are getting less bullish. The number of bullish hedge fund positions retreated by 4 in recent months. Our calculations also showed that NTES isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). NTES was in 30 hedge funds’ portfolios at the end of September. There were 34 hedge funds in our database with NTES holdings at the end of the previous quarter.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

MOORE GLOBAL INVESTMENTS

Louis Bacon Moore of Moore Capital

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we’re going to review the latest hedge fund action surrounding NetEase, Inc (NASDAQ:NTES).

Hedge fund activity in NetEase, Inc (NASDAQ:NTES)

Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from one quarter earlier. By comparison, 26 hedge funds held shares or bullish call options in NTES 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.

More specifically, Orbis Investment Management was the largest shareholder of NetEase, Inc (NASDAQ:NTES), with a stake worth $2496.9 million reported as of the end of September. Trailing Orbis Investment Management was Fisher Asset Management, which amassed a stake valued at $225 million. Steadfast Capital Management, Coatue Management, and Renaissance Technologies 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 Orbis Investment Management allocated the biggest weight to NetEase, Inc (NASDAQ:NTES), around 18.44% of its 13F portfolio. Sensato Capital Management is also relatively very bullish on the stock, setting aside 5.14 percent of its 13F equity portfolio to NTES.

Seeing as NetEase, Inc (NASDAQ:NTES) has faced bearish sentiment from the smart money, logic holds that there were a few fund managers who were dropping their positions entirely in the third quarter. Intriguingly, Daniel Gold’s QVT Financial dropped the biggest investment of the 750 funds tracked by Insider Monkey, totaling close to $2.6 million in stock. Paul Hondros’s fund, AlphaOne Capital Partners, also sold off its stock, about $1.8 million worth. These transactions are interesting, as total hedge fund interest fell by 4 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as NetEase, Inc (NASDAQ:NTES) but similarly valued. These stocks are Xcel Energy Inc (NASDAQ:XEL), Thomson Reuters Corporation (NYSE:TRI), Lam Research Corporation (NASDAQ:LRCX), and General Mills, Inc. (NYSE:GIS). All of these stocks’ market caps resemble NTES’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
XEL 17 573407 -1
TRI 19 360770 2
LRCX 47 2130443 12
GIS 35 916081 -4
Average 29.5 995175 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $995 million. That figure was $3513 million in NTES’s case. Lam Research Corporation (NASDAQ:LRCX) is the most popular stock in this table. On the other hand Xcel Energy Inc (NASDAQ:XEL) is the least popular one with only 17 bullish hedge fund positions. NetEase, Inc (NASDAQ:NTES) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on NTES, though not to the same extent, as the stock returned 34.7% during 2019 and outperformed the market as well.
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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