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How Did New Oriental Education & Tech Group Inc. (NYSE:EDU) Compare Against Hedge Fund Darlings in 2019?

Debasis Saha

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in New Oriental Education & Tech Group Inc. (NYSE:EDU).

Is New Oriental Education & Tech Group Inc. (NYSE:EDU) a splendid investment now? The smart money is betting on the stock. The number of long hedge fund bets went up by 3 in recent months. Our calculations also showed that EDU 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). EDU was in 35 hedge funds' portfolios at the end of the third quarter of 2019. There were 32 hedge funds in our database with EDU positions at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_337892" align="alignnone" width="2480"] Lei Zhang of Hillhouse Capital Management[/caption]

Lei Zhang Hillhouse Capital

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. Keeping this in mind we're going to view the key hedge fund action regarding New Oriental Education & Tech Group Inc. (NYSE:EDU).

Hedge fund activity in New Oriental Education & Tech Group Inc. (NYSE:EDU)

Heading into the fourth quarter of 2019, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in EDU over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is EDU A Good Stock To Buy?

More specifically, Hillhouse Capital Management was the largest shareholder of New Oriental Education & Tech Group Inc. (NYSE:EDU), with a stake worth $305.8 million reported as of the end of September. Trailing Hillhouse Capital Management was Tiger Global Management, which amassed a stake valued at $260.7 million. Alkeon Capital Management, Melvin Capital Management, and Tairen Capital 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 Tairen Capital allocated the biggest weight to New Oriental Education & Tech Group Inc. (NYSE:EDU), around 13.27% of its 13F portfolio. Kylin Management is also relatively very bullish on the stock, setting aside 13.1 percent of its 13F equity portfolio to EDU.

Now, specific money managers have jumped into New Oriental Education & Tech Group Inc. (NYSE:EDU) headfirst. Hillhouse Capital Management, managed by Lei Zhang, created the most valuable position in New Oriental Education & Tech Group Inc. (NYSE:EDU). Hillhouse Capital Management had $305.8 million invested in the company at the end of the quarter. Renaissance Technologies also made a $80.7 million investment in the stock during the quarter. The following funds were also among the new EDU investors: Gabriel Plotkin's Melvin Capital Management, Benjamin A. Smith's Laurion Capital Management, and Guardian Capital's GuardCap Asset Management.

Let's now take a look at hedge fund activity in other stocks similar to New Oriental Education & Tech Group Inc. (NYSE:EDU). These stocks are HCP, Inc. (NYSE:HCP), Alexandria Real Estate Equities Inc (NYSE:ARE), STMicroelectronics N.V. (NYSE:STM), and Mettler-Toledo International Inc. (NYSE:MTD). This group of stocks' market valuations resemble EDU's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HCP,25,562264,-1 ARE,21,343145,-6 STM,11,94533,-2 MTD,22,326854,2 Average,19.75,331699,-1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $332 million. That figure was $1511 million in EDU's case. HCP, Inc. (NYSE:HCP) is the most popular stock in this table. On the other hand STMicroelectronics N.V. (NYSE:STM) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks New Oriental Education & Tech Group Inc. (NYSE:EDU) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on EDU as the stock returned 128% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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