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Did Hedge Funds Drop The Ball On Nevro Corp (NVRO) ?

Abigail Fisher

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 of 2018 due to various reasons. Nevertheless, the data show elite investors' consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETFs by nearly 10 percentage points during the first 11 months of 2019. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at Nevro Corp (NYSE:NVRO) from the perspective of those elite funds.

Is Nevro Corp (NYSE:NVRO) an attractive investment right now? The smart money is getting less bullish. The number of bullish hedge fund positions shrunk by 7 lately. Our calculations also showed that NVRO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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_262340" align="aligncenter" width="500"] Arthur B Cohen and Joseph Healey of Healthcor Management[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. 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 already gained 20 percent. With all of this in mind we're going to take a gander at the latest hedge fund action surrounding Nevro Corp (NYSE:NVRO).

Hedge fund activity in Nevro Corp (NYSE:NVRO)

At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. On the other hand, there were a total of 24 hedge funds with a bullish position in NVRO a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

The largest stake in Nevro Corp (NYSE:NVRO) was held by D E Shaw, which reported holding $180.9 million worth of stock at the end of September. It was followed by Perceptive Advisors with a $83.8 million position. Other investors bullish on the company included Healthcor Management, Citadel Investment Group, and Redmile Group. In terms of the portfolio weights assigned to each position Tiger Eye Capital allocated the biggest weight to Nevro Corp (NYSE:NVRO), around 5.67% of its 13F portfolio. Parian Global Management is also relatively very bullish on the stock, earmarking 4.39 percent of its 13F equity portfolio to NVRO.

Judging by the fact that Nevro Corp (NYSE:NVRO) has witnessed bearish sentiment from hedge fund managers, we can see that there lies a certain "tier" of fund managers who were dropping their full holdings by the end of the third quarter. Intriguingly, James E. Flynn's Deerfield Management said goodbye to the biggest investment of the 750 funds watched by Insider Monkey, valued at about $25 million in stock. Renaissance Technologies, also said goodbye to its stock, about $8.3 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 review hedge fund activity in other stocks similar to Nevro Corp (NYSE:NVRO). We will take a look at Boyd Gaming Corporation (NYSE:BYD), DouYu International Holdings Limited (NASDAQ:DOYU), Power Integrations Inc (NASDAQ:POWI), and Pattern Energy Group Inc (NASDAQ:PEGI). This group of stocks' market values are closest to NVRO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BYD,25,214519,-5 DOYU,10,50432,10 POWI,12,97704,3 PEGI,13,51412,1 Average,15,103517,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $104 million. That figure was $632 million in NVRO's case. Boyd Gaming Corporation (NYSE:BYD) is the most popular stock in this table. On the other hand DouYu International Holdings Limited (NASDAQ:DOYU) is the least popular one with only 10 bullish hedge fund positions. Nevro Corp (NYSE:NVRO) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on NVRO as the stock returned 30% during the fourth quarter (through the end of November) 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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