Hedge Funds Dipping Their Toes Back Into New Relic Inc (NEWR)

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 New Relic Inc (NYSE:NEWR) and determine whether hedge funds had an edge regarding this stock.

New Relic Inc (NYSE:NEWR) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. NEWR has experienced an increase in enthusiasm from smart money in recent months. There were 31 hedge funds in our database with NEWR positions at the end of the first quarter. Our calculations also showed that NEWR 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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 also 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. Keeping this in mind we’re going to go over the key hedge fund action surrounding New Relic Inc (NYSE:NEWR).

What does smart money think about New Relic Inc (NYSE:NEWR)?

At Q2’s end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in NEWR a year ago. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is NEWR A Good Stock To Buy?

More specifically, Eminence Capital was the largest shareholder of New Relic Inc (NYSE:NEWR), with a stake worth $319.9 million reported as of the end of September. Trailing Eminence Capital was Matrix Capital Management, which amassed a stake valued at $233.2 million. HMI Capital, Tiger Global Management LLC, and Two Sigma Advisors 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 HMI Capital allocated the biggest weight to New Relic Inc (NYSE:NEWR), around 10.65% of its 13F portfolio. Toronado Partners is also relatively very bullish on the stock, designating 10.42 percent of its 13F equity portfolio to NEWR.

Consequently, key hedge funds were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the biggest position in New Relic Inc (NYSE:NEWR). Arrowstreet Capital had $16.4 million invested in the company at the end of the quarter. Guy Shahar’s DSAM Partners also initiated a $11.6 million position during the quarter. The other funds with brand new NEWR positions are Steve Cohen’s Point72 Asset Management, Michel Massoud’s Melqart Asset Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as New Relic Inc (NYSE:NEWR) but similarly valued. These stocks are Nektar Therapeutics (NASDAQ:NKTR), First Citizens BancShares Inc. (NASDAQ:FCNCA), Wingstop Inc (NASDAQ:WING), Neogen Corporation (NASDAQ:NEOG), First Financial Bankshares Inc (NASDAQ:FFIN), TriNet Group Inc (NYSE:TNET), and SelectQuote, Inc. (NYSE:SLQT). This group of stocks’ market values match NEWR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NKTR 26 269126 9
FCNCA 15 112679 -2
WING 28 311031 1
NEOG 18 40479 2
FFIN 18 20741 4
TNET 21 338757 2
SLQT 29 289573 29
Average 22.1 197484 6.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.1 hedge funds with bullish positions and the average amount invested in these stocks was $197 million. That figure was $1207 million in NEWR’s case. SelectQuote, Inc. (NYSE:SLQT) is the most popular stock in this table. On the other hand First Citizens BancShares Inc. (NASDAQ:FCNCA) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks New Relic Inc (NYSE:NEWR) is more popular among hedge funds. Our overall hedge fund sentiment score for NEWR is 82.9. 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 still beat the market by 23.2 percentage points. Unfortunately NEWR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NEWR were disappointed as the stock returned -10.8% since the end of 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.

Follow New Relic Inc. (NYSE:NEWR)

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