The market has been volatile in the last few months as the Federal Reserve finalized its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q3 and the beginning of Q4. In this article, we analyze what the smart money thinks of Applied Optoelectronics Inc (NASDAQ:AAOI) and find out how it is affected by hedge funds' moves.
Applied Optoelectronics Inc (NASDAQ:AAOI) shareholders have witnessed a decrease in support from the world's most elite money managers of late. AAOI was in 10 hedge funds' portfolios at the end of the third quarter of 2019. There were 13 hedge funds in our database with AAOI holdings at the end of the previous quarter. 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 below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the 21st century investor’s toolkit there are a lot of methods investors have at their disposal to grade their holdings. A couple of the most useful methods are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the top picks of the elite fund managers can outperform their index-focused peers by a solid amount (see the details here).
[caption id="attachment_193003" align="alignnone" width="600"] Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to take a glance at the recent hedge fund action surrounding Applied Optoelectronics Inc (NASDAQ:AAOI).
How are hedge funds trading Applied Optoelectronics Inc (NASDAQ:AAOI)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AAOI over the last 17 quarters. With hedge funds' sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
Among these funds, Royce & Associates held the most valuable stake in Applied Optoelectronics Inc (NASDAQ:AAOI), which was worth $5.5 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $4.7 million worth of shares. Newtyn Management, Citadel Investment Group, and D E Shaw 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 G2 Investment Partners Management allocated the biggest weight to Applied Optoelectronics Inc (NASDAQ:AAOI), around 0.42% of its 13F portfolio. Newtyn Management is also relatively very bullish on the stock, setting aside 0.37 percent of its 13F equity portfolio to AAOI.
Seeing as Applied Optoelectronics Inc (NASDAQ:AAOI) has witnessed declining sentiment from hedge fund managers, it's safe to say that there lies a certain "tier" of money managers that slashed their entire stakes last quarter. It's worth mentioning that Renaissance Technologies cut the largest stake of the 750 funds monitored by Insider Monkey, valued at an estimated $0.9 million in stock, and John Overdeck and David Siegel's Two Sigma Advisors was right behind this move, as the fund cut about $0.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds last quarter.
Let's now review hedge fund activity in other stocks similar to Applied Optoelectronics Inc (NASDAQ:AAOI). These stocks are SC Health Corporation (NYSE:SCPE), Era Group Inc (NYSE:ERA), ProQR Therapeutics NV (NASDAQ:PRQR), and Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC). This group of stocks' market values are similar to AAOI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SCPE,16,73061,16 ERA,6,20340,1 PRQR,8,33544,-1 NGVC,9,13308,-3 Average,9.75,35063,3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $25 million in AAOI's case. SC Health Corporation (NYSE:SCPE) is the most popular stock in this table. On the other hand Era Group Inc (NYSE:ERA) is the least popular one with only 6 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. 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 -4.6% during the fourth quarter (through the end of November) 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.
Disclosure: None. This article was originally published at Insider Monkey.