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Hedge Funds Aren’t Crazy About NetEase, Inc (NTES) Anymore

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards NetEase, Inc (NASDAQ:NTES) and determine whether hedge funds skillfully traded this stock.

NetEase, Inc (NASDAQ:NTES) shareholders have witnessed a decrease in enthusiasm from smart money lately. NetEase, Inc (NASDAQ:NTES) was in 38 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 49. Our calculations also showed that NTES isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Rajiv Jain of GQG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s take a peek at the fresh hedge fund action regarding NetEase, Inc (NASDAQ:NTES).

How have hedgies been trading NetEase, Inc (NASDAQ:NTES)?

At Q2’s end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the previous quarter. On the other hand, there were a total of 34 hedge funds with a bullish position in NTES a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is NTES A Good Stock To Buy?

Among these funds, Orbis Investment Management held the most valuable stake in NetEase, Inc (NASDAQ:NTES), which was worth $2515.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $533.3 million worth of shares. GQG Partners, Fisher Asset Management, and Steadfast Capital 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 Orbis Investment Management allocated the biggest weight to NetEase, Inc (NASDAQ:NTES), around 18.93% of its 13F portfolio. Ovata Capital Management is also relatively very bullish on the stock, earmarking 4.32 percent of its 13F equity portfolio to NTES.

Seeing as NetEase, Inc (NASDAQ:NTES) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few fund managers that decided to sell off their full holdings by the end of the second quarter. Intriguingly, Ken Heebner’s Capital Growth Management dropped the biggest position of all the hedgies monitored by Insider Monkey, comprising about $21.2 million in stock. Ernest Chow and Jonathan Howe’s fund, Sensato Capital Management, also sold off its stock, about $12.8 million worth. These moves are interesting, as total hedge fund interest was cut by 1 funds by the end of the second quarter.

Let’s check out hedge fund activity in other stocks similar to NetEase, Inc (NASDAQ:NTES). These stocks are Duke Energy Corporation (NYSE:DUK), Activision Blizzard, Inc. (NASDAQ:ATVI), CME Group Inc (NASDAQ:CME), Micron Technology, Inc. (NASDAQ:MU), Chubb Limited (NYSE:CB), Ecolab Inc. (NYSE:ECL), and Takeda Pharmaceutical Company Limited (NYSE:TAK). This group of stocks’ market caps are similar to NTES’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DUK 33 906929 -2
ATVI 97 3564560 -4
CME 60 2336649 -2
MU 84 4285777 -10
CB 40 1288157 7
ECL 46 2099678 8
TAK 18 790266 -4
Average 54 2181717 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 54 hedge funds with bullish positions and the average amount invested in these stocks was $2182 million. That figure was $4594 million in NTES’s case. Activision Blizzard, Inc. (NASDAQ:ATVI) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE:TAK) is the least popular one with only 18 bullish hedge fund positions. NetEase, Inc (NASDAQ:NTES) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NTES is 39.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. A small number of hedge funds were also right about betting on NTES, though not to the same extent, as the stock returned 13.8% during the first two months of Q3 and outperformed the market.

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