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Should You Avoid Chembio Diagnostics Inc (CEMI) Too?

Asma UL Husna

Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about Chembio Diagnostics Inc (NASDAQ:CEMI).

Is Chembio Diagnostics Inc (NASDAQ:CEMI) a buy here? The best stock pickers are reducing their bets on the stock. The number of bullish hedge fund positions shrunk by 2 in recent months. Our calculations also showed that CEMI isn't among the 30 most popular stocks among hedge funds. CEMI was in 2 hedge funds' portfolios at the end of September. There were 4 hedge funds in our database with CEMI holdings at the end of the previous quarter.

In the financial world there are a lot of signals stock market investors can use to evaluate stocks. A couple of the most under-the-radar signals are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the best picks of the best money managers can beat the market by a significant margin (see the details here).

[caption id="attachment_193003" align="aligncenter" width="450"] Chuck Royce of Royce & Associates[/caption]

Chuck Royce

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a look at the recent hedge fund action surrounding Chembio Diagnostics Inc (NASDAQ:CEMI).

What does smart money think about Chembio Diagnostics Inc (NASDAQ:CEMI)?

Heading into the fourth quarter of 2019, a total of 2 of the hedge funds tracked by Insider Monkey were long this stock, a change of -50% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CEMI over the last 17 quarters. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

CEMI_nov2019

More specifically, Nantahala Capital Management was the largest shareholder of Chembio Diagnostics Inc (NASDAQ:CEMI), with a stake worth $7.6 million reported as of the end of September. Trailing Nantahala Capital Management was Royce & Associates, which amassed a stake valued at $3.8 million.

Judging by the fact that Chembio Diagnostics Inc (NASDAQ:CEMI) has witnessed a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of fund managers who were dropping their positions entirely in the third quarter. At the top of the heap, Charles Davidson and Joseph Jacobs's Wexford Capital dumped the biggest stake of all the hedgies tracked by Insider Monkey, worth about $0.6 million in stock, and Renaissance Technologies was right behind this move, as the fund sold off about $0.2 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds in the third quarter.

Let's go over hedge fund activity in other stocks similar to Chembio Diagnostics Inc (NASDAQ:CEMI). We will take a look at Steel Connect, Inc. (NASDAQ:STCN), HC2 Holdings Inc (NYSE:HCHC), Vaccinex, Inc. (NASDAQ:VCNX), and Riverview Financial Corporation (NASDAQ:RIVE). All of these stocks' market caps are similar to CEMI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STCN,5,37813,1 HCHC,14,4588,-1 VCNX,2,9256,1 RIVE,5,9321,2 Average,6.5,15245,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $11 million in CEMI's case. HC2 Holdings Inc (NYSE:HCHC) is the most popular stock in this table. On the other hand Vaccinex, Inc. (NASDAQ:VCNX) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Chembio Diagnostics Inc (NASDAQ:CEMI) is even less popular than VCNX. Hedge funds dodged a bullet by taking a bearish stance towards CEMI. Our calculations showed that the top 20 most popular hedge fund stocks returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately CEMI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CEMI investors were disappointed as the stock returned -31.7% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market so far in Q4.

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

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