Were Hedge Funds Right About NetEase, Inc (NTES)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards NetEase, Inc (NASDAQ:NTES) at the end of the first quarter and determine whether the smart money was really smart about this stock.

NetEase, Inc (NASDAQ:NTES) was in 39 hedge funds’ portfolios at the end of the first quarter of 2020. NTES has seen a decrease in enthusiasm from smart money of late. There were 44 hedge funds in our database with NTES positions at the end of the previous quarter. Our calculations also showed that NTES isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

AlphaOne Capital Partners' Returns, AUM and Holdings

Paul Hondros of AlphaOne Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind let’s take a glance at the key hedge fund action surrounding NetEase, Inc (NASDAQ:NTES).

Hedge fund activity in NetEase, Inc (NASDAQ:NTES)

Heading into the second quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the fourth quarter of 2019. By comparison, 30 hedge funds held shares or bullish call options in NTES a year ago. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Orbis Investment Management held the most valuable stake in NetEase, Inc (NASDAQ:NTES), which was worth $2149.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $302.3 million worth of shares. Steadfast Capital Management, Fisher Asset Management, and GLG Partners 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 20.46% of its 13F portfolio. Sensato Capital Management is also relatively very bullish on the stock, earmarking 10.51 percent of its 13F equity portfolio to NTES.

Judging by the fact that NetEase, Inc (NASDAQ:NTES) has experienced a decline in interest from hedge fund managers, logic holds that there was a specific group of funds that elected to cut their full holdings last quarter. Interestingly, Hyder Ahmad’s Broad Peak Investment Holdings sold off the largest investment of the “upper crust” of funds followed by Insider Monkey, valued at an estimated $42.3 million in stock. Louis Bacon’s fund, Moore Global Investments, also said goodbye to its stock, about $15.3 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 5 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to NetEase, Inc (NASDAQ:NTES). These stocks are National Grid plc (NYSE:NGG), Zoom Video Communications, Inc. (NASDAQ:ZM), Walgreens Boots Alliance Inc (NASDAQ:WBA), and Equinor ASA (NYSE:EQNR). All of these stocks’ market caps match NTES’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NGG 6 435493 0
ZM 47 2383850 19
WBA 45 461497 7
EQNR 11 281375 -3
Average 27.25 890554 5.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $891 million. That figure was $3286 million in NTES’s case. Zoom Video Communications, Inc. (NASDAQ:ZM) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 6 bullish hedge fund positions. NetEase, Inc (NASDAQ:NTES) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on NTES as the stock returned 34.1% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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