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Were Hedge Funds Right About New Oriental Education & Technology Group Inc. (EDU)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded New Oriental Education & Technology Group Inc. (NYSE:EDU) and determine whether the smart money was really smart about this stock.

Is New Oriental Education & Technology Group Inc. (NYSE:EDU) an outstanding investment today? Investors who are in the know were becoming less confident. The number of bullish hedge fund bets were trimmed by 8 recently. Our calculations also showed that EDU 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). EDU was in 42 hedge funds’ portfolios at the end of the first quarter of 2020. There were 50 hedge funds in our database with EDU positions at the end of the previous quarter.

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

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.

YORK CAPITAL MANAGEMENT

James Dinan of York Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the fresh hedge fund action encompassing New Oriental Education & Technology Group Inc. (NYSE:EDU).

What have hedge funds been doing with New Oriental Education & Technology Group Inc. (NYSE:EDU)?

At the end of the first quarter, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in EDU over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Melvin Capital Management, managed by Gabriel Plotkin, holds the largest position in New Oriental Education & Technology Group Inc. (NYSE:EDU). Melvin Capital Management has a $285.6 million position in the stock, comprising 2.3% of its 13F portfolio. On Melvin Capital Management’s heels is Renaissance Technologies, which holds a $253.4 million position; 0.2% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors with similar optimism consist of Chase Coleman’s Tiger Global Management LLC, Panayotis Takis Sparaggis’s Alkeon Capital Management and Rajiv Jain’s GQG Partners. In terms of the portfolio weights assigned to each position Kylin Management allocated the biggest weight to New Oriental Education & Technology Group Inc. (NYSE:EDU), around 18.1% of its 13F portfolio. Sensato Capital Management is also relatively very bullish on the stock, dishing out 8.71 percent of its 13F equity portfolio to EDU.

Due to the fact that New Oriental Education & Technology Group Inc. (NYSE:EDU) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few hedgies that elected to cut their entire stakes by the end of the first quarter. Interestingly, Lei Zhang’s Hillhouse Capital Management cut the largest investment of the 750 funds followed by Insider Monkey, comprising close to $73.1 million in stock. Rob Citrone’s fund, Discovery Capital Management, also dropped its stock, about $10.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 8 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to New Oriental Education & Technology Group Inc. (NYSE:EDU). These stocks are Coca-Cola European Partners plc (NYSE:CCEP), Snap Inc. (NYSE:SNAP), Tencent Music Entertainment Group (NYSE:TME), and Simon Property Group, Inc (NYSE:SPG). All of these stocks’ market caps match EDU’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CCEP 22 185913 1
SNAP 48 929814 -18
TME 25 455610 -1
SPG 29 419445 3
Average 31 497696 -3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $498 million. That figure was $1555 million in EDU’s case. Snap Inc. (NYSE:SNAP) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 22 bullish hedge fund positions. New Oriental Education & Technology Group Inc. (NYSE:EDU) 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 EDU, though not to the same extent, as the stock returned 20.3% during the second quarter and outperformed the market as well.

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