Hedge Funds Cashed Out Napco Security Technologies Inc (NSSC) At The Wrong Time?

In this article we will take a look at whether hedge funds think Napco Security Technologies Inc (NASDAQ:NSSC) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Napco Security Technologies Inc (NASDAQ:NSSC) has experienced a decrease in support from the world’s most elite money managers of late. NSSC was in 5 hedge funds’ portfolios at the end of the first quarter of 2020. There were 9 hedge funds in our database with NSSC positions at the end of the previous quarter. Our calculations also showed that NSSC 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.

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 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 51 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.

David Harding

David Harding of Winton Capital Management

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 analyze the new hedge fund action encompassing Napco Security Technologies Inc (NASDAQ:NSSC).

What does smart money think about Napco Security Technologies Inc (NASDAQ:NSSC)?

At Q1’s end, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -44% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NSSC over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, G2 Investment Partners Management was the largest shareholder of Napco Security Technologies Inc (NASDAQ:NSSC), with a stake worth $1.5 million reported as of the end of September. Trailing G2 Investment Partners Management was Winton Capital Management, which amassed a stake valued at $0.7 million. Citadel Investment Group, AQR Capital Management, and PEAK6 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 G2 Investment Partners Management allocated the biggest weight to Napco Security Technologies Inc (NASDAQ:NSSC), around 0.51% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.02 percent of its 13F equity portfolio to NSSC.

Because Napco Security Technologies Inc (NASDAQ:NSSC) has experienced falling interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of money managers that elected to cut their positions entirely last quarter. It’s worth mentioning that Principal Global Investors’s Columbus Circle Investors sold off the biggest position of all the hedgies tracked by Insider Monkey, valued at about $9.1 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund dropped about $4.4 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 4 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Napco Security Technologies Inc (NASDAQ:NSSC). We will take a look at Crescent Capital BDC, Inc. (NASDAQ:CCAP), Cowen Inc. (NASDAQ:COWN), Domo Inc. (NASDAQ:DOMO), and Unity Biotechnology, Inc. (NASDAQ:UBX). This group of stocks’ market values are similar to NSSC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CCAP 5 38910 5
COWN 18 55296 0
DOMO 15 72386 -3
UBX 5 2370 -2
Average 10.75 42241 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $3 million in NSSC’s case. Cowen Inc. (NASDAQ:COWN) is the most popular stock in this table. On the other hand Crescent Capital BDC, Inc. (NASDAQ:CCAP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Napco Security Technologies Inc (NASDAQ:NSSC) is even less popular than CCAP. Hedge funds clearly dropped the ball on NSSC as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on NSSC as the stock returned 49.8% so far in the second quarter and outperformed the market by an even larger margin.

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