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Is AAOI A Good Stock To Buy Now?

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Abigail Fisher
·6 min read
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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. Insider Monkey finished processing 817 13F filings submitted by hedge funds and prominent investors. These filings show these funds' portfolio positions as of September 30th, 2020. What do these smart investors think about Applied Optoelectronics Inc (NASDAQ:AAOI)?

Is AAOI a good stock to buy now? Applied Optoelectronics Inc (NASDAQ:AAOI) investors should be aware of a decrease in enthusiasm from smart money lately. Applied Optoelectronics Inc (NASDAQ:AAOI) was in 9 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 23. Our calculations also showed that AAOI isn't among the 30 most popular stocks among hedge funds (click for Q3 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 66 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

David E. Shaw of D.E. Shaw
David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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. You can subscribe to our free daily newsletter on our website. Now we're going to review the recent hedge fund action regarding Applied Optoelectronics Inc (NASDAQ:AAOI).

Do Hedge Funds Think AAOI Is A Good Stock To Buy Now?

At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. By comparison, 10 hedge funds held shares or bullish call options in AAOI a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the biggest position in Applied Optoelectronics Inc (NASDAQ:AAOI). Arrowstreet Capital has a $4.2 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Newtyn Management, led by Noah Levy and Eugene Dozortsev, holding a $3.6 million position; the fund has 0.9% of its 13F portfolio invested in the stock. Other professional money managers that are bullish contain Ken Griffin's Citadel Investment Group, D. E. Shaw's D E Shaw and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Newtyn Management allocated the biggest weight to Applied Optoelectronics Inc (NASDAQ:AAOI), around 0.86% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, designating 0.06 percent of its 13F equity portfolio to AAOI.

Since Applied Optoelectronics Inc (NASDAQ:AAOI) has experienced declining sentiment from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of funds that elected to cut their entire stakes heading into Q4. Intriguingly, Mark Coe's Intrinsic Edge Capital said goodbye to the largest position of the "upper crust" of funds watched by Insider Monkey, comprising an estimated $8.2 million in stock. Israel Englander's fund, Millennium Management, also cut its stock, about $1.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 3 funds heading into Q4.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Applied Optoelectronics Inc (NASDAQ:AAOI) but similarly valued. These stocks are Graybug Vision, Inc. (NASDAQ:GRAY), Sierra Bancorp (NASDAQ:BSRR), W&T Offshore, Inc. (NYSE:WTI), MOGU Inc. (NYSE:MOGU), Limoneira Company (NASDAQ:LMNR), Denison Mines Corp (NYSE:DNN), and Whitestone REIT (NYSE:WSR). This group of stocks' market valuations are similar to AAOI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GRAY,10,136937,10 BSRR,9,9163,0 WTI,8,12428,-7 MOGU,6,29948,4 LMNR,2,679,-3 DNN,6,4815,2 WSR,8,9493,-1 Average,7,29066,0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $29 million. That figure was $13 million in AAOI's case. Graybug Vision, Inc. (NASDAQ:GRAY) is the most popular stock in this table. On the other hand Limoneira Company (NASDAQ:LMNR) is the least popular one with only 2 bullish hedge fund positions. Applied Optoelectronics Inc (NASDAQ:AAOI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AAOI is 57.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and beat the market again by 16.2 percentage points. Unfortunately AAOI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AAOI were disappointed as the stock returned -25.3% since the end of September (through 12/8) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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