We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by more than 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Ciena Corporation (NYSE:CIEN).
Ciena Corporation (NYSE:CIEN) was in 29 hedge funds' portfolios at the end of September. CIEN investors should pay attention to a decrease in activity from the world's largest hedge funds in recent months. There were 36 hedge funds in our database with CIEN holdings at the end of the previous quarter. Our calculations also showed that CIEN isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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_26340" align="aligncenter" width="594"] Ken Griffin of Citadel Investment Group[/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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let's review the latest hedge fund action encompassing Ciena Corporation (NYSE:CIEN).
Hedge fund activity in Ciena Corporation (NYSE:CIEN)
Heading into the fourth quarter of 2019, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from the previous quarter. On the other hand, there were a total of 25 hedge funds with a bullish position in CIEN a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AQR Capital Management was the largest shareholder of Ciena Corporation (NYSE:CIEN), with a stake worth $118.6 million reported as of the end of September. Trailing AQR Capital Management was Citadel Investment Group, which amassed a stake valued at $93.2 million. D E Shaw, Arrowstreet Capital, and Renaissance Technologies 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 Cavalry Asset Management allocated the biggest weight to Ciena Corporation (NYSE:CIEN), around 5.32% of its 13F portfolio. Boardman Bay Capital Management is also relatively very bullish on the stock, setting aside 4.53 percent of its 13F equity portfolio to CIEN.
Seeing as Ciena Corporation (NYSE:CIEN) has experienced declining sentiment from hedge fund managers, logic holds that there were a few money managers who were dropping their entire stakes by the end of the third quarter. It's worth mentioning that Brandon Haley's Holocene Advisors cut the biggest position of the 750 funds monitored by Insider Monkey, valued at an estimated $53.4 million in stock, and Peter Muller's PDT Partners was right behind this move, as the fund sold off about $10.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 7 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Ciena Corporation (NYSE:CIEN). We will take a look at Anaplan, Inc. (NYSE:PLAN), Owl Rock Capital Corporation (NYSE:ORCC), Brixmor Property Group Inc (NYSE:BRX), and Healthcare Trust Of America Inc (NYSE:HTA). All of these stocks' market caps match CIEN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PLAN,42,2009371,5 ORCC,6,141871,6 BRX,16,118738,1 HTA,18,270702,5 Average,20.5,635171,4.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $635 million. That figure was $489 million in CIEN's case. Anaplan, Inc. (NYSE:PLAN) is the most popular stock in this table. On the other hand Owl Rock Capital Corporation (NYSE:ORCC) is the least popular one with only 6 bullish hedge fund positions. Ciena Corporation (NYSE:CIEN) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CIEN wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CIEN were disappointed as the stock returned 25.9% in 2019 and trailed 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. 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.