It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Nelnet, Inc. (NYSE:NNI).
Is Nelnet, Inc. (NYSE:NNI) a marvelous investment right now? Investors who are in the know are reducing their bets on the stock. The number of long hedge fund bets went down by 1 in recent months. Our calculations also showed that NNI isn’t among the 30 most popular stocks among hedge funds. NNI was in 14 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 15 hedge funds in our database with NNI positions at the end of the previous quarter.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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.
We’re going to review the latest hedge fund action surrounding Nelnet, Inc. (NYSE:NNI).
How are hedge funds trading Nelnet, Inc. (NYSE:NNI)?
At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NNI over the last 14 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Magnolia Capital Fund, managed by Adam Peterson, holds the most valuable position in Nelnet, Inc. (NYSE:NNI). Magnolia Capital Fund has a $45 million position in the stock, comprising 7.1% of its 13F portfolio. Coming in second is Tegean Capital Management, led by Thomas G. Maheras, holding a $5.2 million position; 5.1% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that hold long positions encompass Joe Huber’s Huber Capital Management, Cliff Asness’s AQR Capital Management and Jim Simons’s Renaissance Technologies.
Since Nelnet, Inc. (NYSE:NNI) has faced a decline in interest from hedge fund managers, logic holds that there exists a select few money managers that decided to sell off their positions entirely heading into Q3. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest position of the “upper crust” of funds watched by Insider Monkey, worth about $1.9 million in stock, and Chuck Royce’s Royce & Associates was right behind this move, as the fund sold off about $1 million worth. These moves are interesting, as total hedge fund interest was cut by 1 funds heading into Q3.
Let’s now take a look at hedge fund activity in other stocks similar to Nelnet, Inc. (NYSE:NNI). These stocks are Avanos Medical, Inc. (NYSE:AVNS), Advanced Disposal Services, Inc. (NYSE:ADSW), RPC, Inc. (NYSE:RES), and ABM Industries, Inc. (NYSE:ABM). This group of stocks’ market values resemble NNI’s market value.
|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 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $78 million. That figure was $68 million in NNI’s case. Advanced Disposal Services, Inc. (NYSE:ADSW) is the most popular stock in this table. On the other hand RPC, Inc. (NYSE:RES) is the least popular one with only 12 bullish hedge fund positions. Nelnet, Inc. (NYSE:NNI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately NNI wasn’t nearly as popular as these 15 stock and hedge funds that were betting on NNI were disappointed as the stock returned 10.7% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.