How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Nova Measuring Instruments Ltd. (NASDAQ:NVMI) and determine whether hedge funds had an edge regarding this stock.
Nova Measuring Instruments Ltd. (NASDAQ:NVMI) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of March. At the end of this article we will also compare NVMI to other stocks including Zuora, Inc. (NYSE:ZUO), Scientific Games Corp (NASDAQ:SGMS), and Trupanion Inc (NASDAQ:TRUP) to get a better sense of its popularity. 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.
[caption id="attachment_30600" align="aligncenter" width="392"] Bruce Kovner of Caxton Associates LP[/caption]
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 let's go over the latest hedge fund action regarding Nova Measuring Instruments Ltd. (NASDAQ:NVMI).
What have hedge funds been doing with Nova Measuring Instruments Ltd. (NASDAQ:NVMI)?
At Q1's end, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in NVMI over the last 18 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
More specifically, Adage Capital Management was the largest shareholder of Nova Measuring Instruments Ltd. (NASDAQ:NVMI), with a stake worth $72.7 million reported as of the end of September. Trailing Adage Capital Management was Renaissance Technologies, which amassed a stake valued at $61.6 million. Royce & Associates, D E Shaw, and Two Sigma Advisors 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 Royce & Associates allocated the biggest weight to Nova Measuring Instruments Ltd. (NASDAQ:NVMI), around 0.22% of its 13F portfolio. Adage Capital Management is also relatively very bullish on the stock, earmarking 0.22 percent of its 13F equity portfolio to NVMI.
Due to the fact that Nova Measuring Instruments Ltd. (NASDAQ:NVMI) has witnessed bearish sentiment from the smart money, we can see that there were a few money managers who sold off their full holdings last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the biggest investment of all the hedgies monitored by Insider Monkey, totaling close to $0.3 million in stock, and Michael Gelband's ExodusPoint Capital was right behind this move, as the fund dumped about $0.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to Nova Measuring Instruments Ltd. (NASDAQ:NVMI). We will take a look at Zuora, Inc. (NYSE:ZUO), Scientific Games Corp (NASDAQ:SGMS), Trupanion Inc (NASDAQ:TRUP), and Covetrus, Inc. (NASDAQ:CVET). This group of stocks' market caps are similar to NVMI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ZUO,23,102623,-3 SGMS,22,226145,-11 TRUP,13,140895,0 CVET,22,114918,2 Average,20,146145,-3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $146 million. That figure was $158 million in NVMI's case. Zuora, Inc. (NYSE:ZUO) is the most popular stock in this table. On the other hand Trupanion Inc (NASDAQ:TRUP) 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 TRUP. 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 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. A small number of hedge funds were also right about betting on NVMI as the stock returned 47.6% in the second quarter and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.