The market has been volatile as the Federal Reserve continues its rate hikes to normalize the interest rates. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by about 4 percentage points through November 16th. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, and the funds’ movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of NetEase, Inc (NASDAQ:NTES) and find out how it is affected by hedge funds’ moves.
NetEase, Inc (NASDAQ:NTES) has experienced an increase in enthusiasm from smart money lately. NTES was in 26 hedge funds’ portfolios at the end of September. There were 24 hedge funds in our database with NTES holdings at the end of the previous quarter. Our calculations also showed that NTES 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.
Let’s take a look at the recent hedge fund action regarding NetEase, Inc (NASDAQ:NTES).
What does the smart money think about NetEase, Inc (NASDAQ:NTES)?
At Q3’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NTES over the last 13 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
More specifically, Orbis Investment Management was the largest shareholder of NetEase, Inc (NASDAQ:NTES), with a stake worth $2230 million reported as of the end of September. Trailing Orbis Investment Management was Steadfast Capital Management, which amassed a stake valued at $276 million. Alkeon Capital Management, Fisher Asset Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, specific money managers were leading the bulls’ herd. Steadfast Capital Management, managed by Robert Pitts, initiated the largest position in NetEase, Inc (NASDAQ:NTES). Steadfast Capital Management had $276 million invested in the company at the end of the quarter. James Parsons’s Junto Capital Management also initiated a $23 million position during the quarter. The other funds with brand new NTES positions are Glenn Russell Dubin’s Highbridge Capital Management, Steve Cohen’s Point72 Asia (Singapore), and Bruce Kovner’s Caxton Associates LP.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as NetEase, Inc (NASDAQ:NTES) but similarly valued. These stocks are Centene Corp (NYSE:CNC), Pioneer Natural Resources Company (NYSE:PXD), NXP Semiconductors NV (NASDAQ:NXPI), and Fortive Corporation (NYSE:FTV). This group of stocks’ market valuations resemble NTES’s market valuation.
|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 55 hedge funds with bullish positions and the average amount invested in these stocks was $3.80 billion. That figure was $3.08 billion in NTES’s case. NXP Semiconductors NV (NASDAQ:NXPI) is the most popular stock in this table. On the other hand Fortive Corporation (NYSE:FTV) is the least popular one with only 35 bullish hedge fund positions. Compared to these stocks NetEase, Inc (NASDAQ:NTES) is even less popular than FTV. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.
Disclosure: None. This article was originally published at Insider Monkey.