Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Inphi Corporation (NYSE:IPHI)? The smart money sentiment can provide an answer to this question.
Is Inphi Corporation (NYSE:IPHI) a safe investment today? Prominent investors are becoming hopeful. The number of bullish hedge fund bets advanced by 3 recently. Our calculations also showed that iphi isn’t among the 30 most popular stocks among hedge funds. IPHI was in 14 hedge funds’ portfolios at the end of the third quarter of 2018. There were 11 hedge funds in our database with IPHI 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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let’s review the recent hedge fund action surrounding Inphi Corporation (NYSE:IPHI).
What have hedge funds been doing with Inphi Corporation (NYSE:IPHI)?
At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 27% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in IPHI heading into this year. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Among these funds, Maverick Capital held the most valuable stake in Inphi Corporation (NYSE:IPHI), which was worth $69.6 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $54.1 million worth of shares. Moreover, Adage Capital Management, Driehaus Capital, and Carlson Capital were also bullish on Inphi Corporation (NYSE:IPHI), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, key money managers have jumped into Inphi Corporation (NYSE:IPHI) headfirst. Driehaus Capital, managed by Richard Driehaus, created the most outsized position in Inphi Corporation (NYSE:IPHI). Driehaus Capital had $12.6 million invested in the company at the end of the quarter. Charles Davidson and Joseph Jacobs’s Wexford Capital also made a $2.6 million investment in the stock during the quarter. The other funds with brand new IPHI positions are Peter Muller’s PDT Partners, John Overdeck and David Siegel’s Two Sigma Advisors, and D. E. Shaw’s D E Shaw.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Inphi Corporation (NYSE:IPHI) but similarly valued. These stocks are M.D.C. Holdings, Inc. (NYSE:MDC), Meritor Inc (NYSE:MTOR), Mueller Industries, Inc. (NYSE:MLI), and Solid Biosciences Inc. (NASDAQ:SLDB). This group of stocks’ market values resemble IPHI’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 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $266 million. That figure was $199 million in IPHI’s case. Meritor Inc (NYSE:MTOR) is the most popular stock in this table. On the other hand M.D.C. Holdings, Inc. (NYSE:MDC) is the least popular one with only 11 bullish hedge fund positions. Inphi Corporation (NYSE:IPHI) 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. In this regard MTOR might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.