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Hedge Funds Are Buying Youdao, Inc. (DAO)

In this article you are going to find out whether hedge funds think Youdao, Inc. (NYSE:DAO) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Youdao, Inc. (NYSE:DAO) investors should pay attention to an increase in hedge fund sentiment of late. Our calculations also showed that DAO 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 numerous signals stock traders put to use to analyze publicly traded companies. Some of the most innovative signals are hedge fund and insider trading signals. We have shown that, historically, those who follow the best picks of the elite hedge fund managers can trounce the market by a healthy margin (see the details here).

RENAISSANCE TECHNOLOGIES

Jim Simons Founder of Renaissance Technologies

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to review the new hedge fund action regarding Youdao, Inc. (NYSE:DAO).

How are hedge funds trading Youdao, Inc. (NYSE:DAO)?

At Q1’s end, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 100% from the fourth quarter of 2019. By comparison, 0 hedge funds held shares or bullish call options in DAO a year ago. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Orbis Investment Management was the largest shareholder of Youdao, Inc. (NYSE:DAO), with a stake worth $167.4 million reported as of the end of September. Trailing Orbis Investment Management was Keywise Capital Management, which amassed a stake valued at $10.9 million. Springbok Capital, Renaissance Technologies, and Oasis Management 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 Keywise Capital Management allocated the biggest weight to Youdao, Inc. (NYSE:DAO), around 2.94% of its 13F portfolio. Orbis Investment Management is also relatively very bullish on the stock, dishing out 1.59 percent of its 13F equity portfolio to DAO.

As aggregate interest increased, specific money managers were leading the bulls’ herd. Keywise Capital Management, managed by Fang Zheng, assembled the most outsized position in Youdao, Inc. (NYSE:DAO). Keywise Capital Management had $10.9 million invested in the company at the end of the quarter. Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital also made a $3.7 million investment in the stock during the quarter. The other funds with brand new DAO positions are Renaissance Technologies, Seth Fischer’s Oasis Management, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Youdao, Inc. (NYSE:DAO) but similarly valued. These stocks are Norwegian Cruise Line Holdings Ltd (NYSE:NCLH), Ternium S.A. (NYSE:TX), Colfax Corporation (NYSE:CFX), and United Bankshares, Inc. (NASDAQ:UBSI). This group of stocks’ market values resemble DAO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NCLH 20 113661 -18
TX 8 62086 -3
CFX 32 421377 -11
UBSI 13 46714 -5
Average 18.25 160960 -9.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $161 million. That figure was $184 million in DAO’s case. Colfax Corporation (NYSE:CFX) is the most popular stock in this table. On the other hand Ternium S.A. (NYSE:TX) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Youdao, Inc. (NYSE:DAO) is even less popular than TX. 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 13.9% in 2020 through June 10th but managed to beat the market by 14.2 percentage points. A small number of hedge funds were also right about betting on DAO, though not to the same extent, as the stock returned 24% during the second quarter (through June 10th) and outperformed the market as well.

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