Did Hedge Funds Make The Right Call On NeoPhotonics Corp (NPTN) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtNeoPhotonics Corp (NYSE:NPTN) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is NeoPhotonics Corp (NYSE:NPTN) the right investment to pursue these days? The smart money was taking an optimistic view. The number of long hedge fund positions rose by 5 recently. Our calculations also showed that NPTN 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). NPTN was in 24 hedge funds’ portfolios at the end of March. There were 19 hedge funds in our database with NPTN holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.


Cliff Asness of AQR Capital Management

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. Keeping this in mind we’re going to review the latest hedge fund action regarding NeoPhotonics Corp (NYSE:NPTN).

Hedge fund activity in NeoPhotonics Corp (NYSE:NPTN)

At the end of the first quarter, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 26% from the fourth quarter of 2019. On the other hand, there were a total of 22 hedge funds with a bullish position in NPTN a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is NPTN A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey,  Renaissance Technologies has the number one position in NeoPhotonics Corp (NYSE:NPTN), worth close to $14.6 million, corresponding to less than 0.1%% of its total 13F portfolio. The second largest stake is held by Masters Capital Management, managed by Mike Masters, which holds a $7.3 million position; 0.8% of its 13F portfolio is allocated to the stock. Remaining members of the smart money with similar optimism comprise D. E. Shaw’s D E Shaw, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Litespeed Management allocated the biggest weight to NeoPhotonics Corp (NYSE:NPTN), around 5.76% of its 13F portfolio. Boardman Bay Capital Management is also relatively very bullish on the stock, dishing out 2.63 percent of its 13F equity portfolio to NPTN.

With a general bullishness amongst the heavyweights, key money managers have jumped into NeoPhotonics Corp (NYSE:NPTN) headfirst. Manatuck Hill Partners, managed by Mark Broach, initiated the most outsized position in NeoPhotonics Corp (NYSE:NPTN). Manatuck Hill Partners had $1.7 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $0.7 million investment in the stock during the quarter. The other funds with brand new NPTN positions are Minhua Zhang’s Weld Capital Management, Joel Greenblatt’s Gotham Asset Management, and Thomas Bailard’s Bailard Inc.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as NeoPhotonics Corp (NYSE:NPTN) but similarly valued. We will take a look at Resources Connection, Inc. (NASDAQ:RECN), Village Super Market, Inc. (NASDAQ:VLGEA), Adaptimmune Therapeutics plc (NASDAQ:ADAP), and Tuscan Holdings Corp. (NASDAQ:THCB). This group of stocks’ market caps are similar to NPTN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RECN 10 39658 -2
VLGEA 7 22483 -3
ADAP 11 163151 2
THCB 9 62865 -1
Average 9.25 72039 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $72 million. That figure was $69 million in NPTN’s case. Adaptimmune Therapeutics plc (NASDAQ:ADAP) is the most popular stock in this table. On the other hand Village Super Market, Inc. (NASDAQ:VLGEA) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks NeoPhotonics Corp (NYSE:NPTN) is more popular among hedge funds. 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 still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on NPTN, though not to the same extent, as the stock returned 22.5% in Q2 and outperformed the market as well.

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