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Hedge Funds Dropped The Ball On Diodes Incorporated (DIOD)

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 Diodes Incorporated (NASDAQ:DIOD) and determine whether hedge funds skillfully traded this stock.

Diodes Incorporated (NASDAQ:DIOD) shareholders have witnessed a decrease in support from the world’s most elite money managers of late. Our calculations also showed that DIOD 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 a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 most profitable companies in the world to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to analyze the recent hedge fund action encompassing Diodes Incorporated (NASDAQ:DIOD).

Hedge fund activity in Diodes Incorporated (NASDAQ:DIOD)

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -28% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DIOD over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Is DIOD A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Chuck Royce’s Royce & Associates has the largest position in Diodes Incorporated (NASDAQ:DIOD), worth close to $19.1 million, amounting to 0.3% of its total 13F portfolio. The second most bullish fund manager is Fisher Asset Management, managed by Ken Fisher, which holds a $9.8 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other members of the smart money with similar optimism contain Michael Rockefeller and KarláKroeker’s Woodline Partners,  Renaissance Technologies and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Diodes Incorporated (NASDAQ:DIOD), around 1.05% of its 13F portfolio. Woodline Partners is also relatively very bullish on the stock, setting aside 0.36 percent of its 13F equity portfolio to DIOD.

Since Diodes Incorporated (NASDAQ:DIOD) has witnessed falling interest from the smart money, it’s safe to say that there was a specific group of hedgies that elected to cut their positions entirely heading into Q4. Interestingly, Brandon Haley’s Holocene Advisors sold off the largest stake of the 750 funds watched by Insider Monkey, comprising close to $2.9 million in stock. Peter Algert and Kevin Coldiron’s fund, Algert Coldiron Investors, also dumped its stock, about $2 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 5 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Diodes Incorporated (NASDAQ:DIOD). These stocks are DouYu International Holdings Limited (NASDAQ:DOYU), Sterling Bancorp (NYSE:STL), Intercept Pharmaceuticals Inc (NASDAQ:ICPT), and Brookfield Business Partners L.P. (NYSE:BBU). This group of stocks’ market caps resemble DIOD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DOYU 15 30200 9
STL 25 176182 -5
ICPT 19 258760 -8
BBU 2 1459 -2
Average 15.25 116650 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $117 million. That figure was $50 million in DIOD’s case. Sterling Bancorp (NYSE:STL) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 2 bullish hedge fund positions. Diodes Incorporated (NASDAQ:DIOD) is not the least popular stock in this group but hedge fund interest is still below average. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. A small number of hedge funds were also right about betting on DIOD, though not to the same extent, as the stock returned 21.9% during the second quarter and outperformed the market.

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