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Did Hedge Funds Drop The Ball On NMI Holdings Inc (NMIH) ?

Nina Todic

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 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 NMI Holdings Inc (NASDAQ:NMIH).

NMI Holdings Inc (NASDAQ:NMIH) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 19 hedge funds' portfolios at the end of the third quarter of 2019. At the end of this article we will also compare NMIH to other stocks including ServisFirst Bancshares, Inc. (NASDAQ:SFBS), Alexander & Baldwin Inc (NYSE:ALEX), and Mueller Water Products, Inc. (NYSE:MWA) to get a better sense of its popularity. 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_30614" align="aligncenter" width="489"] Howard Marks of Oaktree Capital Management[/caption]

Howard Marks OAKTREE CAPITAL MANAGEMENT

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the fresh hedge fund action encompassing NMI Holdings Inc (NASDAQ:NMIH).

How are hedge funds trading NMI Holdings Inc (NASDAQ:NMIH)?

At Q3's end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. By comparison, 12 hedge funds held shares or bullish call options in NMIH a year ago. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Among these funds, Oaktree Capital Management held the most valuable stake in NMI Holdings Inc (NASDAQ:NMIH), which was worth $130.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $40.4 million worth of shares. Millennium Management, One Tusk Investment Partners, and Citadel Investment Group 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 One Tusk Investment Partners allocated the biggest weight to NMI Holdings Inc (NASDAQ:NMIH), around 10.89% of its 13F portfolio. Oaktree Capital Management is also relatively very bullish on the stock, earmarking 2.56 percent of its 13F equity portfolio to NMIH.

Due to the fact that NMI Holdings Inc (NASDAQ:NMIH) has experienced a decline in interest from hedge fund managers, it's safe to say that there exists a select few funds that slashed their full holdings in the third quarter. At the top of the heap, Richard Driehaus's Driehaus Capital sold off the biggest stake of the "upper crust" of funds watched by Insider Monkey, worth close to $11.9 million in stock. David Harding's fund, Winton Capital Management, also dumped its stock, about $0.7 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks similar to NMI Holdings Inc (NASDAQ:NMIH). These stocks are ServisFirst Bancshares, Inc. (NASDAQ:SFBS), Alexander & Baldwin Inc (NYSE:ALEX), Mueller Water Products, Inc. (NYSE:MWA), and PDC Energy Inc (NASDAQ:PDCE). This group of stocks' market values are similar to NMIH's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SFBS,8,11329,-1 ALEX,8,20353,-2 MWA,20,282575,2 PDCE,23,231814,9 Average,14.75,136518,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $137 million. That figure was $224 million in NMIH's case. PDC Energy Inc (NASDAQ:PDCE) is the most popular stock in this table. On the other hand ServisFirst Bancshares, Inc. (NASDAQ:SFBS) is the least popular one with only 8 bullish hedge fund positions. NMI Holdings Inc (NASDAQ:NMIH) 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 NMIH as the stock returned 27.8% 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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