Is Blue Nile Inc (NILE) Right for Your Portfolio?

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards Blue Nile Inc (NASDAQ:NILE) , and what that likely means for the prospects of the company and its stock.

Blue Nile Inc (NASDAQ:NILE) has experienced an increase in activity from the world’s largest hedge funds of late. NILE was in 14 hedge funds’ portfolios at the end of September. There were 13 hedge funds in our database with NILE positions at the end of the previous quarter. At the end of this article we will also compare NILE to other stocks including Franklin Financial Network Inc (NYSE:FSB), Conyers Park Acquisition Corp. (NASDAQ:CPAA), and Navigator Holdings Ltd (NYSE:NVGS) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

With all of this in mind, let’s view the recent action regarding Blue Nile Inc (NASDAQ:NILE).

How have hedgies been trading Blue Nile Inc (NASDAQ:NILE)?

Heading into the fourth quarter of 2016, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, growth of 8% from the previous quarter. By comparison, 12 hedge funds held shares or bullish call options in NILE heading into this year. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Michael Pausic’s Foxhaven Asset Management has the largest position in Blue Nile Inc (NASDAQ:NILE), worth close to $16 million, corresponding to 1.5% of its total 13F portfolio. On Foxhaven Asset Management’s heels is Renaissance Technologies, one of the largest hedge funds in the world, holding a $15.7 million position; the fund has less than 0.1% of its 13F portfolio invested in the stock. Remaining peers with similar optimism include Charles Clough’s Clough Capital Partners, Peter Schliemann’s Rutabaga Capital Management and Eric Semler’s TCS Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As one would reasonably expect, some big names have been driving this bullishness. TCS Capital Management also made a $4.1 million investment in the stock during the quarter. The following funds were also among the new NILE investors: Ken Griffin’s Citadel Investment Group, Scott Fine and Peter Richards’s Empire Capital Management, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Blue Nile Inc (NASDAQ:NILE) but similarly valued. These stocks are Franklin Financial Network Inc (NYSE:FSB), Conyers Park Acquisition Corp. (NASDAQ:CPAA), Navigator Holdings Ltd (NYSE:NVGS), and First Foundation Inc (NASDAQ:FFWM). This group of stocks’ market valuations resemble NILE’s market valuation.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $69 million in NILE’s case. Conyers Park Acquisition Corp. (NASDAQ:CPAA) is the most popular stock in this table. On the other hand First Foundation Inc (NASDAQ:FFWM) is the least popular one with only 7 bullish hedge fund positions. Blue Nile Inc (NASDAQ:NILE) 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. In this regard CPAA might be a better candidate to consider taking a long position in.

Disclosure: None