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Did Hedge Funds Drop The Ball On NetGear, Inc. (NTGR)?

Reymerlyn Martin

We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds' top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. That's a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is NetGear, Inc. (NASDAQ:NTGR) the right pick for your portfolio? Investors who are in the know are becoming less confident. The number of bullish hedge fund bets fell by 5 lately. Our calculations also showed that NTGR isn't among the 30 most popular stocks among hedge funds (see the video below). NTGR was in 11 hedge funds' portfolios at the end of June. There were 16 hedge funds in our database with NTGR holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Lee Ainslie MAVERICK CAPITAL
Lee Ainslie MAVERICK CAPITAL

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the key hedge fund action regarding NetGear, Inc. (NASDAQ:NTGR).

What have hedge funds been doing with NetGear, Inc. (NASDAQ:NTGR)?

Heading into the third quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -31% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NTGR over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

NTGR_oct2019
NTGR_oct2019

The largest stake in NetGear, Inc. (NASDAQ:NTGR) was held by AWH Capital, which reported holding $3.9 million worth of stock at the end of March. It was followed by Two Sigma Advisors with a $2.5 million position. Other investors bullish on the company included AQR Capital Management, PDT Partners, and Marshall Wace LLP.

Due to the fact that NetGear, Inc. (NASDAQ:NTGR) has witnessed declining sentiment from the aggregate hedge fund industry, it's safe to say that there were a few hedge funds who sold off their full holdings by the end of the second quarter. Intriguingly, Chuck Royce's Royce & Associates said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, totaling close to $5.9 million in stock, and Renaissance Technologies was right behind this move, as the fund sold off about $2.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 5 funds by the end of the second quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as NetGear, Inc. (NASDAQ:NTGR) but similarly valued. These stocks are Stamps.com Inc. (NASDAQ:STMP), Goldman Sachs BDC, Inc. (NYSE:GSBD), Oritani Financial Corp. (NASDAQ:ORIT), and Tivity Health, Inc. (NASDAQ:TVTY). This group of stocks' market values are similar to NTGR's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STMP,19,216258,-10 GSBD,1,3395,0 ORIT,6,36758,-1 TVTY,16,188253,-4 Average,10.5,111166,-3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $111 million. That figure was $11 million in NTGR's case. Stamps.com Inc. (NASDAQ:STMP) is the most popular stock in this table. On the other hand Goldman Sachs BDC, Inc. (NYSE:GSBD) is the least popular one with only 1 bullish hedge fund positions. NetGear, Inc. (NASDAQ:NTGR) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on NTGR as the stock returned 27.4% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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