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Hedge Funds Aren’t Crazy About NeoPhotonics Corp (NPTN) Anymore

It’s a little-known fact that stock performance is not evenly distributed (i.e. you don’t have a 50/50 chance of picking a market-beating stock). In fact, despite the S&P 500 gaining about 5.2% between November 1, 2014 and October 30, 2015, less than 49% of the stocks in the index beat the market during that time. In contrast, the 30 stocks from the index which were the most popular among the investors that we track returned 9.5% during that time and 63% of them beat the market. This shows that while hedge funds get a lot of flak from the mainstream media for their performance, it can be rewarding to follow their moves using the right sets of data. Even then, there is never a fool proof strategy to generating returns, as even the collective wisdom of top hedge funds gets it wrong some times, as in the case of some of their top picks from the index like Micron and Anadarko. The data though, shows that following the collective wisdom of select hedge funds can be a very wise move overall.

NeoPhotonics Corp (NYSE:NPTN) is a manufacturer of photonic integrated circuits and its stock surged by nearly 200% since the beginning of the year. However, the best stock pickers are turning less bullish. The number of bullish hedge fund positions dropped by 5 during the third quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Oppenheimer Holdings Inc. (USA) (NYSE:OPY), TechTarget Inc (NASDAQ:TTGT), and Pacific Biosciences of California (NASDAQ:PACB) to gather more data points.

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In the eyes of most traders, hedge funds are assumed to be worthless, old financial vehicles of yesteryear. While there are more than 8000 funds with their doors open at the moment, Our experts hone in on the elite of this group, about 700 funds. It is estimated that this group of investors handle bulk of the hedge fund industry’s total asset base, and by tracking their first-class investments, Insider Monkey has figured out a few investment strategies that have historically beaten the broader indices. Insider Monkey’s small-cap hedge fund strategy beat the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

Now, we’re going to take a look at the new action regarding NeoPhotonics Corp (NYSE:NPTN).

Hedge fund activity in NeoPhotonics Corp (NYSE:NPTN)

At the Q3’s end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a drop of 28% from the second quarter. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Chuck Royce’s Royce & Associates has the number one position in NeoPhotonics Corp (NYSE:NPTN), worth close to $13.9 million, corresponding to 0.1% of its total 13F portfolio. The second most bullish fund is Mike Masters’ Masters Capital Management, with a $13.6 million position; the fund has 0.5% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish comprise Brett Hendrickson’s Nokomis Capital, Jim Simons’ Renaissance Technologies, and George Soros’ Soros Fund Management.

Judging by the fact that NeoPhotonics Corp (NYSE:NPTN) has experienced a decline in interest from the aggregate hedge fund industry, we can see that there exists a select few money managers that elected to cut their positions entirely heading into Q4. At the top of the heap, Israel Englander’s Millennium Management dropped the largest position of all the hedgies tracked by Insider Monkey, valued at close to $5.1 million in stock. Richard Driehaus’ fund, Driehaus Capital, also cut its stock, about $4.9 million worth.

Let’s now take a look at hedge fund activity in other stocks similar to NeoPhotonics Corp (NYSE:NPTN). We will take a look at Oppenheimer Holdings Inc. (USA) (NYSE:OPY), TechTarget Inc (NASDAQ:TTGT), Pacific Biosciences of California (NASDAQ:PACB), and Ameresco Inc (NYSE:AMRC). This group of stocks’ market valuations match NPTN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OPY 10 30604 2
TTGT 16 56519 1
PACB 11 76029 -4
AMRC 7 10267 1

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $43 million. That figure was $60 million in NPTN’s case. TechTarget Inc (NASDAQ:TTGT) is the most popular stock in this table. On the other hand Ameresco Inc (NYSE:AMRC) is the least popular one with only 7 bullish hedge fund positions. NeoPhotonics Corp (NYSE:NPTN) 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. In this regard TTGT might be a better candidate to consider a long position.

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