Was The Smart Money Right About Avoiding NetEase, Inc (NTES)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about NetEase, Inc (NASDAQ:NTES).

NetEase, Inc (NASDAQ:NTES) investors should be aware of a decrease in support from the world’s most elite money managers of late. NetEase, Inc (NASDAQ:NTES) was in 38 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 49. There were 39 hedge funds in our database with NTES holdings at the end of March. Our calculations also showed that NTES isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a gander at the latest hedge fund action encompassing NetEase, Inc (NASDAQ:NTES).

How are hedge funds trading NetEase, Inc (NASDAQ:NTES)?

At second quarter’s end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NTES over the last 20 quarters. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

More specifically, Orbis Investment Management was the largest shareholder of NetEase, Inc (NASDAQ:NTES), with a stake worth $2515.6 million reported as of the end of June. Trailing Orbis Investment Management was Renaissance Technologies, which amassed a stake valued at $533.3 million. GQG Partners, Fisher Asset Management, and Steadfast Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Orbis Investment Management allocated the biggest weight to NetEase, Inc (NASDAQ:NTES), around 18.93% of its 13F portfolio. Ovata Capital Management is also relatively very bullish on the stock, setting aside 4.32 percent of its 13F equity portfolio to NTES.

Judging by the fact that NetEase, Inc (NASDAQ:NTES) has faced falling interest from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of hedgies that slashed their positions entirely heading into Q3. Interestingly, Ken Heebner’s Capital Growth Management said goodbye to the biggest position of the 750 funds monitored by Insider Monkey, valued at close to $21.2 million in stock. Ernest Chow and Jonathan Howe’s fund, Sensato Capital Management, also dumped its stock, about $12.8 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 1 funds heading into Q3.

Let’s check out hedge fund activity in other stocks similar to NetEase, Inc (NASDAQ:NTES). These stocks are Duke Energy Corporation (NYSE:DUK), Activision Blizzard, Inc. (NASDAQ:ATVI), CME Group Inc (NASDAQ:CME), Micron Technology, Inc. (NASDAQ:MU), Chubb Limited (NYSE:CB), Ecolab Inc. (NYSE:ECL), and Takeda Pharmaceutical Company Limited (NYSE:TAK). All of these stocks’ market caps are similar to NTES’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 54 hedge funds with bullish positions and the average amount invested in these stocks was $2182 million. That figure was $4594 million in NTES’s case. Activision Blizzard, Inc. (NASDAQ:ATVI) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE:TAK) is the least popular one with only 18 bullish hedge fund positions. NetEase, Inc (NASDAQ:NTES) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NTES is 39.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately NTES wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); NTES investors were disappointed as the stock returned 1.4% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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