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Were Hedge Funds Right About Selling Nova Measuring Instruments Ltd. (NVMI)?

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Nova Measuring Instruments Ltd. (NASDAQ:NVMI).

Is Nova Measuring Instruments Ltd. (NASDAQ:NVMI) the right investment to pursue these days? The smart money is in a pessimistic mood. The number of bullish hedge fund bets shrunk by 2 lately. Our calculations also showed that NVMI isn’t among the 30 most popular stocks among hedge funds (see the video below). NVMI was in 9 hedge funds’ portfolios at the end of the second quarter of 2019. There were 11 hedge funds in our database with NVMI holdings at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Phill Gross, Adage Capital Management

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to review the recent hedge fund action encompassing Nova Measuring Instruments Ltd. (NASDAQ:NVMI).

What have hedge funds been doing with Nova Measuring Instruments Ltd. (NASDAQ:NVMI)?

At Q2’s end, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in NVMI a year ago. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

No of Hedge Funds with NVMI Positions

The largest stake in Nova Measuring Instruments Ltd. (NASDAQ:NVMI) was held by Adage Capital Management, which reported holding $67.5 million worth of stock at the end of March. It was followed by Renaissance Technologies with a $53.4 million position. Other investors bullish on the company included Royce & Associates, D E Shaw, and Citadel Investment Group.

Since Nova Measuring Instruments Ltd. (NASDAQ:NVMI) has faced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there was a specific group of hedge funds who sold off their entire stakes heading into Q3. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest investment of the 750 funds watched by Insider Monkey, comprising close to $2.3 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also said goodbye to its stock, about $0.4 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 2 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Nova Measuring Instruments Ltd. (NASDAQ:NVMI). These stocks are Gulfport Energy Corporation (NASDAQ:GPOR), Cerus Corporation (NASDAQ:CERS), Mr. Cooper Group Inc. (NASDAQ:COOP), and Falcon Minerals Corporation (NASDAQ:FLMN). This group of stocks’ market values are similar to NVMI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GPOR 17 105656 -6
CERS 13 98617 -4
COOP 23 237258 -4
FLMN 22 119468 5
Average 18.75 140250 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $140 million. That figure was $141 million in NVMI’s case. Mr. Cooper Group Inc. (NASDAQ:COOP) is the most popular stock in this table. On the other hand Cerus Corporation (NASDAQ:CERS) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Nova Measuring Instruments Ltd. (NASDAQ:NVMI) is even less popular than CERS. Hedge funds clearly dropped the ball on NVMI as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on NVMI as the stock returned 24.2% during the third quarter and outperformed the market by an even larger margin.

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

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