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Did Hedge Funds Drop The Ball On NeoPhotonics Corporation (NPTN) ?

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% 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 NeoPhotonics Corporation (NYSE:NPTN) and see how the stock is affected by the recent hedge fund activity.

NeoPhotonics Corporation (NYSE:NPTN) has seen an increase in activity from the world’s largest hedge funds of late. Our calculations also showed that NPTN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a glance at the fresh hedge fund action encompassing NeoPhotonics Corporation (NYSE:NPTN).

What does smart money think about NeoPhotonics Corporation (NYSE:NPTN)?

At the end of the third quarter, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the second quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in NPTN a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

The largest stake in NeoPhotonics Corporation (NYSE:NPTN) was held by Masters Capital Management, which reported holding $9.1 million worth of stock at the end of September. It was followed by AQR Capital Management with a $7.2 million position. Other investors bullish on the company included Citadel Investment Group, D E Shaw, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Boardman Bay Capital Management allocated the biggest weight to NeoPhotonics Corporation (NYSE:NPTN), around 3.83% of its 13F portfolio. Springowl Associates is also relatively very bullish on the stock, earmarking 1.58 percent of its 13F equity portfolio to NPTN.

Consequently, specific money managers have been driving this bullishness. GLG Partners, managed by Noam Gottesman, initiated the most valuable position in NeoPhotonics Corporation (NYSE:NPTN). GLG Partners had $0.5 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $0.5 million position during the quarter. The other funds with brand new NPTN positions are David Harding’s Winton Capital Management, Mike Vranos’s Ellington, and Thomas Bailard’s Bailard Inc.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as NeoPhotonics Corporation (NYSE:NPTN) but similarly valued. We will take a look at UFP Technologies, Inc. (NASDAQ:UFPT), Urovant Sciences Ltd. (NASDAQ:UROV), Cellular Biomedicine Group, Inc. (NASDAQ:CBMG), and WhiteHorse Finance, Inc. (NASDAQ:WHF). This group of stocks’ market valuations are closest to NPTN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UFPT 10 47314 0
UROV 11 41857 3
CBMG 2 13955 1
WHF 3 3065 -2
Average 6.5 26548 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $27 million. That figure was $52 million in NPTN’s case. Urovant Sciences Ltd. (NASDAQ:UROV) is the most popular stock in this table. On the other hand Cellular Biomedicine Group, Inc. (NASDAQ:CBMG) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks NeoPhotonics Corporation (NYSE:NPTN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on NPTN as the stock returned 34.6% during the first two months of Q4 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.

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

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