Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The Insider Monkey team has completed processing the quarterly 13F filings for the December quarter submitted by the hedge funds and other money managers included in our extensive database. Most hedge fund investors experienced strong gains on the back of a strong market performance, which certainly propelled them to adjust their equity holdings so as to maintain the desired risk profile. As a result, the relevancy of these public filings and their content is indisputable, as they may reveal numerous high-potential stocks. The following article will discuss the smart money sentiment towards Ambarella Inc (NASDAQ:AMBA).
Ambarella Inc (NASDAQ:AMBA) was in 26 hedge funds' portfolios at the end of the fourth quarter of 2019. AMBA has experienced a decrease in support from the world's most elite money managers in recent months. There were 30 hedge funds in our database with AMBA holdings at the end of the previous quarter. Our calculations also showed that AMBA isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
[caption id="attachment_26335" align="aligncenter" width="400"] Ken Fisher of Fisher Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now let's analyze the new hedge fund action surrounding Ambarella Inc (NASDAQ:AMBA).
What have hedge funds been doing with Ambarella Inc (NASDAQ:AMBA)?
At Q4's end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards AMBA over the last 18 quarters. With the smart money's sentiment swirling, there exists a few key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Renaissance Technologies, holds the biggest position in Ambarella Inc (NASDAQ:AMBA). Renaissance Technologies has a $65.7 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is D. E. Shaw of D E Shaw, with a $30.4 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other peers that hold long positions consist of Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Ken Griffin's Citadel Investment Group and Principal Global Investors's Columbus Circle Investors. In terms of the portfolio weights assigned to each position Potrero Capital Research allocated the biggest weight to Ambarella Inc (NASDAQ:AMBA), around 2.88% of its 13F portfolio. P.A.W. CAPITAL PARTNERS is also relatively very bullish on the stock, earmarking 2.58 percent of its 13F equity portfolio to AMBA.
Since Ambarella Inc (NASDAQ:AMBA) has faced bearish sentiment from hedge fund managers, logic holds that there lies a certain "tier" of funds who were dropping their entire stakes by the end of the third quarter. At the top of the heap, Israel Englander's Millennium Management dropped the biggest stake of the "upper crust" of funds followed by Insider Monkey, valued at an estimated $20.6 million in stock. Ken Fisher's fund, Fisher Asset Management, also said goodbye to its stock, about $6.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 4 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Ambarella Inc (NASDAQ:AMBA) but similarly valued. We will take a look at Renasant Corporation (NASDAQ:RNST), Coca-Cola Bottling Co. Consolidated (NASDAQ:COKE), SJW Corp. (NYSE:SJW), and TowneBank (NASDAQ:TOWN). This group of stocks' market valuations resemble AMBA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RNST,12,70374,3 COKE,11,27470,-3 SJW,11,145886,-11 TOWN,6,51675,-1 Average,10,73851,-3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $74 million. That figure was $206 million in AMBA's case. Renasant Corporation (NASDAQ:RNST) is the most popular stock in this table. On the other hand TowneBank (NASDAQ:TOWN) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Ambarella Inc (NASDAQ:AMBA) is more popular among hedge funds. 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 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th and still beat the market by 4.2 percentage points. Unfortunately AMBA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AMBA were disappointed as the stock returned -18.9% during the three months of 2020 (through April 6th) 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 most of these stocks already outperformed the market in 2020. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.