Were Hedge Funds Right About Flocking Into Cray Inc. (CRAY) ?

How do we determine whether Cray Inc. (NASDAQ:CRAY) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Cray Inc. (NASDAQ:CRAY) shareholders have witnessed an increase in support from the world’s most elite money managers recently. Our calculations also showed that CRAY 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 40 percentage points since May 2014 through May 30, 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.

Prem Watsa, Fairfax Financial Holdings

Let’s take a gander at the key hedge fund action encompassing Cray Inc. (NASDAQ:CRAY).

How are hedge funds trading Cray Inc. (NASDAQ:CRAY)?

At Q1’s end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 36% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CRAY over the last 15 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).


The largest stake in Cray Inc. (NASDAQ:CRAY) was held by Royce & Associates, which reported holding $25.7 million worth of stock at the end of March. It was followed by ACK Asset Management with a $14.4 million position. Other investors bullish on the company included Millennium Management, Renaissance Technologies, and Fairfax Financial Holdings.

As aggregate interest increased, key hedge funds have jumped into Cray Inc. (NASDAQ:CRAY) headfirst. Hudson Bay Capital Management, managed by Sander Gerber, assembled the most valuable position in Cray Inc. (NASDAQ:CRAY). Hudson Bay Capital Management had $1.2 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also made a $0.7 million investment in the stock during the quarter. The other funds with brand new CRAY positions are David Costen Haley’s HBK Investments, Jeffrey Talpins’s Element Capital Management, and Paul Tudor Jones’s Tudor Investment Corp.

Let’s go over hedge fund activity in other stocks similar to Cray Inc. (NASDAQ:CRAY). We will take a look at Liberty Tripadvisor Holdings Inc (NASDAQ:LTRPA), Methode Electronics Inc. (NYSE:MEI), Domo Inc. (NASDAQ:DOMO), and Funko, Inc. (NASDAQ:FNKO). This group of stocks’ market caps are similar to CRAY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LTRPA 23 279113 3
MEI 10 82822 3
DOMO 21 185107 8
FNKO 16 92590 3
Average 17.5 159908 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $160 million. That figure was $71 million in CRAY’s case. Liberty Tripadvisor Holdings Inc (NASDAQ:LTRPA) is the most popular stock in this table. On the other hand Methode Electronics Inc. (NYSE:MEI) is the least popular one with only 10 bullish hedge fund positions. Cray Inc. (NASDAQ:CRAY) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on CRAY as the stock returned 34.9% during the same period 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.