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Should I Avoid NetEase, Inc (NTES)?

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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 NetEase, Inc (NASDAQ:NTES).

NetEase, Inc (NASDAQ:NTES) shareholders have witnessed a decrease in support from the world's most elite money managers lately. NetEase, Inc (NASDAQ:NTES) was in 32 hedge funds' portfolios at the end of March. The all time high for this statistic is 49. Our calculations also showed that NTES isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

In the eyes of most shareholders, hedge funds are assumed to be slow, outdated investment tools of yesteryear. While there are over 8000 funds with their doors open at present, Our researchers look at the moguls of this club, approximately 850 funds. These investment experts manage most of the smart money's total capital, and by tailing their inimitable stock picks, Insider Monkey has discovered several investment strategies that have historically outperformed the S&P 500 index. Insider Monkey's flagship short hedge fund strategy exceeded the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Also, our monthly newsletter's portfolio of long stock picks returned 206.8% since March 2017 (through May 2021) and beat the S&P 500 Index by more than 115 percentage points. You can download a sample issue of this newsletter on our website .

William Gray Orbis Investment Management
William Gray Orbis Investment Management

William Gray of Orbis Investment Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let's review the key hedge fund action surrounding NetEase, Inc (NASDAQ:NTES).

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

Heading into the second quarter of 2021, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of -16% from the fourth quarter of 2020. By comparison, 39 hedge funds held shares or bullish call options in NTES a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Orbis Investment Management held the most valuable stake in NetEase, Inc (NASDAQ:NTES), which was worth $1889.6 million at the end of the fourth quarter. On the second spot was GQG Partners which amassed $453.9 million worth of shares. Melvin Capital Management, Renaissance Technologies, and Fisher Asset Management 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 Orbis Investment Management allocated the biggest weight to NetEase, Inc (NASDAQ:NTES), around 13.51% of its 13F portfolio. Kerrisdale Capital is also relatively very bullish on the stock, earmarking 2.92 percent of its 13F equity portfolio to NTES.

Because NetEase, Inc (NASDAQ:NTES) has witnessed bearish sentiment from the smart money, it's easy to see that there was a specific group of hedgies that slashed their entire stakes heading into Q2. At the top of the heap, Brandon Haley's Holocene Advisors dumped the largest position of the "upper crust" of funds monitored by Insider Monkey, comprising close to $74.1 million in stock, and James Parsons's Junto Capital Management was right behind this move, as the fund said goodbye to about $26.7 million worth. These moves are important to note, as total hedge fund interest was cut by 6 funds heading into Q2.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as NetEase, Inc (NASDAQ:NTES) but similarly valued. We will take a look at Chubb Limited (NYSE:CB), Becton, Dickinson and Company (NYSE:BDX), Illinois Tool Works Inc. (NYSE:ITW), Norfolk Southern Corp. (NYSE:NSC), KE Holdings Inc (NYSE:BEKE), Dell Technologies Inc. (NYSE:DELL), and Brookfield Asset Management Inc. (NYSE:BAM). This group of stocks' market values resemble NTES's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CB,41,1605208,7 BDX,65,3732947,0 ITW,33,411615,-7 NSC,46,898621,2 BEKE,33,2308833,3 DELL,54,4834607,4 BAM,34,1388352,-4 Average,43.7,2168598,0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 43.7 hedge funds with bullish positions and the average amount invested in these stocks was $2169 million. That figure was $3501 million in NTES's case. Becton, Dickinson and Company (NYSE:BDX) is the most popular stock in this table. On the other hand Illinois Tool Works Inc. (NYSE:ITW) is the least popular one with only 33 bullish hedge fund positions. Compared to these stocks NetEase, Inc (NASDAQ:NTES) is even less popular than ITW. Our overall hedge fund sentiment score for NTES is 18.6. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.8% in 2021 through July 2nd but managed to beat the market by 6 percentage points. A small number of hedge funds were also right about betting on NTES, though not to the same extent, as the stock returned 10% since the end of March (through July 2nd) and outperformed the market as well.

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