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Should You Buy Extreme Networks, Inc (EXTR)?

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 Extreme Networks, Inc (NASDAQ:EXTR).

Extreme Networks, Inc (NASDAQ:EXTR) was in 20 hedge funds’ portfolios at the end of December. EXTR has seen an increase in activity from the world’s largest hedge funds recently. There were 19 hedge funds in our database with EXTR positions at the end of the previous quarter. Our calculations also showed that EXTR isn’t among the 30 most popular stocks among hedge funds.

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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Eric Singer VIEX Capital

Eric Singer of VIEX Capital

Let’s take a gander at the key hedge fund action surrounding Extreme Networks, Inc (NASDAQ:EXTR).

What does the smart money think about Extreme Networks, Inc (NASDAQ:EXTR)?

At Q4’s end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from one quarter earlier. By comparison, 18 hedge funds held shares or bullish call options in EXTR a year ago. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

EXTR_may2019

The largest stake in Extreme Networks, Inc (NASDAQ:EXTR) was held by VIEX Capital Advisors, which reported holding $14.2 million worth of stock at the end of September. It was followed by Millennium Management with a $13.9 million position. Other investors bullish on the company included D E Shaw, Citadel Investment Group, and Marshall Wace LLP.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. PDT Partners, managed by Peter Muller, initiated the largest position in Extreme Networks, Inc (NASDAQ:EXTR). PDT Partners had $1.6 million invested in the company at the end of the quarter. Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital also made a $0.6 million investment in the stock during the quarter. The following funds were also among the new EXTR investors: Paul Tudor Jones’s Tudor Investment Corp, Minhua Zhang’s Weld Capital Management, and David Costen Haley’s HBK Investments.

Let’s check out hedge fund activity in other stocks similar to Extreme Networks, Inc (NASDAQ:EXTR). These stocks are Wabash National Corporation (NYSE:WNC), Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX), Resolute Forest Products Inc (NYSE:RFP), and Multi-Color Corporation (NASDAQ:LABL). This group of stocks’ market values match EXTR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WNC 20 70898 7
CRNX 7 320479 -2
RFP 27 318569 5
LABL 10 17888 5
Average 16 181959 3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $182 million. That figure was $71 million in EXTR’s case. Resolute Forest Products Inc (NYSE:RFP) is the most popular stock in this table. On the other hand Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) is the least popular one with only 7 bullish hedge fund positions. Extreme Networks, Inc (NASDAQ:EXTR) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on EXTR as the stock returned 26.6% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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