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Were Hedge Funds Right About Flocking Into II-VI, Inc. (IIVI) ?

Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter. NASDAQ and Russell 2000 indices were already in correction territory. More importantly, Russell 2000 ETF (IWM) underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points in the fourth quarter. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were paring back their overall exposure and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards II-VI, Inc. (NASDAQ:IIVI).

Is II-VI, Inc. (NASDAQ:IIVI) a buy here? The smart money is becoming hopeful. The number of long hedge fund positions moved up by 9 in recent months. Our calculations also showed that iivi isn’t among the 30 most popular stocks among hedge funds. IIVI was in 22 hedge funds’ portfolios at the end of December. There were 13 hedge funds in our database with IIVI positions at the end of the previous quarter.

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.

Chuck Royce

Let’s take a peek at the fresh hedge fund action surrounding II-VI, Inc. (NASDAQ:IIVI).

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

At Q4’s end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 69% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards IIVI over the last 14 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

No of Hedge Funds with IIVI Positions

The largest stake in II-VI, Inc. (NASDAQ:IIVI) was held by Citadel Investment Group, which reported holding $61.8 million worth of stock at the end of September. It was followed by Daruma Asset Management with a $18.1 million position. Other investors bullish on the company included Royce & Associates, Millennium Management, and Divisar Capital.

As aggregate interest increased, some big names were leading the bulls’ herd. Highbridge Capital Management, managed by Glenn Russell Dubin, created the most outsized position in II-VI, Inc. (NASDAQ:IIVI). Highbridge Capital Management had $9.7 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $8.6 million position during the quarter. The other funds with brand new IIVI positions are Steven Baughman’s Divisar Capital, Anand Parekh’s Alyeska Investment Group, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as II-VI, Inc. (NASDAQ:IIVI) but similarly valued. We will take a look at SailPoint Technologies Holdings, Inc. (NYSE:SAIL), Main Street Capital Corporation (NYSE:MAIN), WNS (Holdings) Limited (NYSE:WNS), and Cal-Maine Foods Inc (NASDAQ:CALM). All of these stocks’ market caps are similar to IIVI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SAIL 22 167257 5
MAIN 9 11748 1
WNS 16 141601 2
CALM 18 163244 -3
Average 16.25 120963 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $121 million. That figure was $139 million in IIVI’s case. SailPoint Technologies Holdings, Inc. (NYSE:SAIL) is the most popular stock in this table. On the other hand Main Street Capital Corporation (NYSE:MAIN) is the least popular one with only 9 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. 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 IIVI as the stock returned 25.5% 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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