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Did Hedge Funds Make The Right Call On NetApp Inc. (NTAP) ?

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 NetApp Inc. (NASDAQ:NTAP) and determine whether hedge funds had an edge regarding this stock.

Is NetApp Inc. (NASDAQ:NTAP) a buy here? Prominent investors were in a bearish mood. The number of long hedge fund positions retreated by 1 in recent months. Our calculations also showed that NTAP 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the recent hedge fund action surrounding NetApp Inc. (NASDAQ:NTAP).

Hedge fund activity in NetApp Inc. (NASDAQ:NTAP)

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in NTAP a year ago. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of NetApp Inc. (NASDAQ:NTAP), with a stake worth $136.9 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $70 million. Two Sigma Advisors, Millennium Management, and Citadel Investment Group 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 Beech Hill Partners allocated the biggest weight to NetApp Inc. (NASDAQ:NTAP), around 2.01% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, setting aside 0.33 percent of its 13F equity portfolio to NTAP.

Judging by the fact that NetApp Inc. (NASDAQ:NTAP) has experienced falling interest from the aggregate hedge fund industry, logic holds that there was a specific group of hedgies that decided to sell off their entire stakes heading into Q4. Intriguingly, Brandon Haley’s Holocene Advisors sold off the biggest investment of all the hedgies watched by Insider Monkey, totaling about $9 million in stock. Thomas Bailard’s fund, Bailard Inc, also dropped its stock, about $2.7 million worth. These moves are important to note, as total hedge fund interest dropped by 1 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as NetApp Inc. (NASDAQ:NTAP) but similarly valued. These stocks are Ubiquiti Inc. (NYSE:UI), Coupa Software Incorporated (NASDAQ:COUP), The AES Corporation (NYSE:AES), and Teradyne, Inc. (NASDAQ:TER). This group of stocks’ market values are similar to NTAP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UI 23 162047 -2
COUP 66 2184206 11
AES 31 445516 4
TER 28 842457 -5
Average 37 908557 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 37 hedge funds with bullish positions and the average amount invested in these stocks was $909 million. That figure was $336 million in NTAP’s case. Coupa Software Incorporated (NASDAQ:COUP) is the most popular stock in this table. On the other hand Ubiquiti Inc. (NYSE:UI) is the least popular one with only 23 bullish hedge fund positions. NetApp Inc. (NASDAQ:NTAP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 and surpassed the market by 15.5 percentage points. Unfortunately NTAP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); NTAP investors were disappointed as the stock returned 7.7% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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