Were Hedge Funds Right About Souring On Luna Innovations Incorporated (LUNA)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Luna Innovations Incorporated (NASDAQ:LUNA) and determine whether hedge funds skillfully traded this stock.

Luna Innovations Incorporated (NASDAQ:LUNA) has seen a decrease in support from the world’s most elite money managers recently. Our calculations also showed that LUNA 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.

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 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 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 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.

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. Now we’re going to take a peek at the recent hedge fund action regarding Luna Innovations Incorporated (NASDAQ:LUNA).

Hedge fund activity in Luna Innovations Incorporated (NASDAQ:LUNA)

Heading into the second quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in LUNA over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Luna Innovations Incorporated (NASDAQ:LUNA), with a stake worth $8.6 million reported as of the end of September. Trailing Renaissance Technologies was ACK Asset Management, which amassed a stake valued at $7.5 million. Royce & Associates, Millennium Management, and SG Capital Management 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 ACK Asset Management allocated the biggest weight to Luna Innovations Incorporated (NASDAQ:LUNA), around 3.75% of its 13F portfolio. SG Capital Management is also relatively very bullish on the stock, earmarking 0.67 percent of its 13F equity portfolio to LUNA.

Seeing as Luna Innovations Incorporated (NASDAQ:LUNA) has witnessed bearish sentiment from the smart money, we can see that there was a specific group of hedge funds who sold off their full holdings by the end of the first quarter. At the top of the heap, Benjamin A. Smith’s Laurion Capital Management dropped the largest stake of the 750 funds monitored by Insider Monkey, totaling close to $0.4 million in stock. Peter Algert and Kevin Coldiron’s fund, Algert Coldiron Investors, also dumped its stock, about $0.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the first quarter.

Let’s check out hedge fund activity in other stocks similar to Luna Innovations Incorporated (NASDAQ:LUNA). These stocks are Endeavour Silver Corp. (NYSE:EXK), FVCBankcorp, Inc. (NASDAQ:FVCB), TCR2 Therapeutics Inc. (NASDAQ:TCRR), and Ames National Corporation (NASDAQ:ATLO). This group of stocks’ market values match LUNA’s market value.

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As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $13 million. That figure was $28 million in LUNA’s case. TCR2 Therapeutics Inc. (NASDAQ:TCRR) is the most popular stock in this table. On the other hand FVCBankcorp, Inc. (NASDAQ:FVCB) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Luna Innovations Incorporated (NASDAQ:LUNA) is more popular among hedge funds. 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 and still beat the market by 15.5 percentage points. Unfortunately LUNA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LUNA were disappointed as the stock returned -5% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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