Is II-VI, Inc. (IIVI) A Good Stock To Buy?

A market correction in the fourth quarter, spurred by a number of global macroeconomic concerns and rising interest rates ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. This is evident in the fact that the Russell 2000 ETF underperformed the S&P 500 ETF by 4 percentage points during the first half of the fourth quarter. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let’s study the hedge fund sentiment to see how those concerns affected their ownership of II-VI, Inc. (NASDAQ:IIVI) during the quarter.

Is II-VI, Inc. (NASDAQ:IIVI) ready to rally soon? Money managers are getting less optimistic. The number of bullish hedge fund bets dropped by 3 recently. Our calculations also showed that iivi isn’t among the 30 most popular stocks among hedge funds.

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 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.

Discovery Capital Management

We’re going to view the latest hedge fund action regarding II-VI, Inc. (NASDAQ:IIVI).

What does the smart money think about II-VI, Inc. (NASDAQ:IIVI)?

At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in IIVI heading into this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with IIVI Positions

Among these funds, Citadel Investment Group held the most valuable stake in II-VI, Inc. (NASDAQ:IIVI), which was worth $55.5 million at the end of the third quarter. On the second spot was Discovery Capital Management which amassed $30.9 million worth of shares. Moreover, Royce & Associates, Osterweis Capital Management, and Adage Capital Management were also bullish on II-VI, Inc. (NASDAQ:IIVI), allocating a large percentage of their portfolios to this stock.

Seeing as II-VI, Inc. (NASDAQ:IIVI) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of money managers who were dropping their entire stakes by the end of the third quarter. At the top of the heap, Israel Englander’s Millennium Management said goodbye to the largest position of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $25.6 million in stock. Principal Global Investors’s fund, Columbus Circle Investors, also dropped its stock, about $5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks similar to II-VI, Inc. (NASDAQ:IIVI). These stocks are iRobot Corporation (NASDAQ:IRBT), Akcea Therapeutics, Inc. (NASDAQ:AKCA), Healthcare Services Group, Inc. (NASDAQ:HCSG), and Southwestern Energy Company (NYSE:SWN). This group of stocks’ market caps are closest to IIVI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IRBT 10 85542 0
AKCA 6 34465 4
HCSG 11 37656 -4
SWN 23 535096 -1
Average 12.5 173190 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $173 million. That figure was $122 million in IIVI’s case. Southwestern Energy Company (NYSE:SWN) is the most popular stock in this table. On the other hand Akcea Therapeutics, Inc. (NASDAQ:AKCA) is the least popular one with only 6 bullish hedge fund positions. II-VI, Inc. (NASDAQ:IIVI) 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 SWN might be a better candidate to consider a long position.

Disclosure: None. This article was originally published at Insider Monkey.