Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Diodes Incorporated (NASDAQ:DIOD).
Is Diodes Incorporated (NASDAQ:DIOD) a buy right now? Investors who are in the know are in a bearish mood. The number of long hedge fund positions shrunk by 5 recently. Our calculations also showed that DIOD isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). DIOD was in 18 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 23 hedge funds in our database with DIOD holdings at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a peek at the latest hedge fund action surrounding Diodes Incorporated (NASDAQ:DIOD).
Hedge fund activity in Diodes Incorporated (NASDAQ:DIOD)
At the end of the fourth quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -22% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in DIOD a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
Among these funds, Royce & Associates held the most valuable stake in Diodes Incorporated (NASDAQ:DIOD), which was worth $28.1 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $19.9 million worth of shares. GLG Partners, AQR Capital Management, and Gotham Asset 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 Zebra Capital Management allocated the biggest weight to Diodes Incorporated (NASDAQ:DIOD), around 0.86% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, dishing out 0.58 percent of its 13F equity portfolio to DIOD.
Due to the fact that Diodes Incorporated (NASDAQ:DIOD) has witnessed bearish sentiment from hedge fund managers, logic holds that there was a specific group of money managers that slashed their full holdings by the end of the third quarter. Interestingly, Renaissance Technologies cut the largest stake of all the hedgies tracked by Insider Monkey, totaling close to $6.4 million in stock. Ken Griffin’s fund, Citadel Investment Group, also dropped its stock, about $2.9 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 5 funds by the end of the third quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Diodes Incorporated (NASDAQ:DIOD) but similarly valued. These stocks are Navistar International Corp (NYSE:NAV), Washington Federal Inc. (NASDAQ:WAFD), BlackLine, Inc. (NASDAQ:BL), and Crocs, Inc. (NASDAQ:CROX). 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|
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $536 million. That figure was $80 million in DIOD’s case. Crocs, Inc. (NASDAQ:CROX) is the most popular stock in this table. On the other hand BlackLine, Inc. (NASDAQ:BL) is the least popular one with only 17 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. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately DIOD wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DIOD investors were disappointed as the stock returned -29.5% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.