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Did Hedge Funds Make The Right Call On Acacia Communications, Inc. (ACIA) ?

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 Acacia Communications, Inc. (NASDAQ:ACIA) and determine whether hedge funds had an edge regarding this stock.

Is Acacia Communications, Inc. (NASDAQ:ACIA) a bargain? The best stock pickers were becoming less hopeful. The number of long hedge fund positions fell by 9 in recent months. Our calculations also showed that ACIA isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Matthew Halbower Pentwater Capital

Matthew Halbower of Pentwater Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind let’s take a peek at the new hedge fund action surrounding Acacia Communications, Inc. (NASDAQ:ACIA).

What have hedge funds been doing with Acacia Communications, Inc. (NASDAQ:ACIA)?

Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ACIA over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Acacia Communications, Inc. (NASDAQ:ACIA) was held by Magnetar Capital, which reported holding $120 million worth of stock at the end of September. It was followed by Alpine Associates with a $115.1 million position. Other investors bullish on the company included TIG Advisors, Citadel Investment Group, and Pentwater Capital Management. In terms of the portfolio weights assigned to each position Alpine Associates allocated the biggest weight to Acacia Communications, Inc. (NASDAQ:ACIA), around 4.58% of its 13F portfolio. TIG Advisors is also relatively very bullish on the stock, dishing out 3.98 percent of its 13F equity portfolio to ACIA.

Due to the fact that Acacia Communications, Inc. (NASDAQ:ACIA) has witnessed declining sentiment from the smart money, we can see that there lies a certain “tier” of hedge funds that elected to cut their positions entirely last quarter. At the top of the heap, Simon Sadler’s Segantii Capital sold off the largest investment of the 750 funds tracked by Insider Monkey, worth close to $15.1 million in stock, and Matthew Mark’s Jet Capital Investors was right behind this move, as the fund sold off about $7.8 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 9 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Acacia Communications, Inc. (NASDAQ:ACIA) but similarly valued. We will take a look at Omnicell, Inc. (NASDAQ:OMCL), El Paso Electric Company (NYSE:EE), Rexnord Corp (NYSE:RXN), and Simpson Manufacturing Co, Inc. (NYSE:SSD). This group of stocks’ market caps resemble ACIA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OMCL 17 54589 4
EE 23 398088 8
RXN 19 213250 -6
SSD 26 197022 2
Average 21.25 215737 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $216 million. That figure was $694 million in ACIA’s case. Simpson Manufacturing Co, Inc. (NYSE:SSD) is the most popular stock in this table. On the other hand Omnicell, Inc. (NASDAQ:OMCL) is the least popular one with only 17 bullish hedge fund positions. Acacia Communications, Inc. (NASDAQ:ACIA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ACIA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ACIA were disappointed as the stock returned 0% during the same time period 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 many of these stocks already outperformed the market so far this year.

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