Hedge Funds Were Right to Bet on GoPro Inc (GPRO) and Yahoo! Inc. (YHOO)

Yahoo! Inc. (NASDAQ:YHOO) and GoPro Inc (NASDAQ:GPRO)’s stocks jumped by around 5% during the Thursday trading session, following analyst updates. Stanford C. Bernstein has upgraded Yahoo! Inc. (NASDAQ:YHOO) stock to ‘Outperform’ from ‘Market Perform’ and increased the price target to $52 from $34. GoPro Inc (NASDAQ:GPRO) also received a bullish outlook from Cowen & Company, which initiated the coverage on the stock with ‘Outperform’ rating and a price target of $76. Year-to-date Yahoo! Inc. (NASDAQ:YHOO) and GoPro Inc (NASDAQ:GPRO) stocks have lost around 30% and 9% respectively.

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In the last earnings report, Yahoo! Inc. (NASDAQ:YHOO) missed the Street’s expectation on earnings for the second quarter, but exceeded the revenue expectations as the company reported earnings of $0.16 per share for the quarter on a revenue of $1.24 billion, whereas the Street was expecting the company to post earnings of $0.18 on a revenue of $1.03 billion. Yahoo! Inc. (NASDAQ:YHOO) stock plunged 4% on Wednesday following a disappointing financial results by Alibaba Group Holding Ltd (NYSE:BABA) for the first quarter of fiscal year 2016. Any swing in the Alibaba stock, might impact the Yahoo stock in the short term.

On the flip side, GoPro Inc (NASDAQ:GPRO) reported financial results that crushed the Street’s expectation for the second quarter. The camera maker reported adjusted earnings of $0.35 per share for the quarter, beating the Street’s expectation of $0.26 per share and reported a revenue of $419.9 million for the quarter, $25 million above the estimate. In the research report published on Thursday, Cowen & Company Analyst mentioned that the United States is expected to account for 45% of global GoPro users and expects the company to deliver 21% compound annual growth in sales and earnings till 2019. Cowen Analyst forecast 64 million units shipped by the end of 2019.

What’s also important is that hedge funds  are bullish on both these stocks, according to our data. Most retail investors ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by returning a cumulative 123% vs. less than 58% for the S&P 500 Index (read more details). Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information.

How did hedge funds trade these stocks?