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Is China Online Education (COE) A Good Investment?

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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in China Online Education Group (NYSE:COE)? The smart money sentiment can provide an answer to this question.

China Online Education Group (NYSE:COE) has seen a decrease in hedge fund sentiment in recent months. China Online Education Group (NYSE:COE) was in 3 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 6. There were 4 hedge funds in our database with COE positions at the end of the fourth quarter. Our calculations also showed that COE isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 115 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.

MILLENNIUM MANAGEMENT
MILLENNIUM MANAGEMENT

Israel Englander of Millennium Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery 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 new hedge fund action surrounding China Online Education Group (NYSE:COE).

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

At Q1's end, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the fourth quarter of 2020. The graph below displays the number of hedge funds with bullish position in COE over the last 23 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

More specifically, Sylebra Capital Management was the largest shareholder of China Online Education Group (NYSE:COE), with a stake worth $8.3 million reported as of the end of March. Trailing Sylebra Capital Management was Renaissance Technologies, which amassed a stake valued at $4.7 million. Millennium Management was 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 Sylebra Capital Management allocated the biggest weight to China Online Education Group (NYSE:COE), around 0.22% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to COE.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Indus Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified COE as a viable investment and initiated a position in the stock.

Let's now review hedge fund activity in other stocks similar to China Online Education Group (NYSE:COE). We will take a look at Verona Pharma plc (NASDAQ:VRNA), Hooker Furniture Corporation (NASDAQ:HOFT), BeyondSpring, Inc. (NASDAQ:BYSI), Phoenix Tree Holdings Limited (NYSE:DNK), CVR Partners LP (NYSE:UAN), Zix Corporation (NASDAQ:ZIXI), and Legacy Housing Corporation (NASDAQ:LEGH). All of these stocks' market caps are similar to COE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VRNA,12,182300,0 HOFT,6,111433,-2 BYSI,12,9688,3 DNK,4,86375,-1 UAN,3,10443,2 ZIXI,10,18156,-4 LEGH,7,23941,1 Average,7.7,63191,-0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.7 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $14 million in COE's case. Verona Pharma plc (NASDAQ:VRNA) is the most popular stock in this table. On the other hand CVR Partners LP (NYSE:UAN) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks China Online Education Group (NYSE:COE) is even less popular than UAN. Our overall hedge fund sentiment score for COE is 19. 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. Hedge funds dodged a bullet by taking a bearish stance towards COE. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.2% in 2021 through June 11th but managed to beat the market again by 3.3 percentage points. Unfortunately COE wasn't nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); COE investors were disappointed as the stock returned -49.2% since the end of the first quarter (through 6/11) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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

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