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 more than 57% each. Hedge funds' top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 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.
New Relic Inc (NYSE:NEWR) was in 35 hedge funds' portfolios at the end of the third quarter of 2019. NEWR investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 29 hedge funds in our database with NEWR positions at the end of the previous quarter. Our calculations also showed that NEWR 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.
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. Now let's take a look at the fresh hedge fund action surrounding New Relic Inc (NYSE:NEWR).
How are hedge funds trading New Relic Inc (NYSE:NEWR)?
At Q3's end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards NEWR over the last 17 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Chase Coleman's Tiger Global Management has the biggest position in New Relic Inc (NYSE:NEWR), worth close to $179.4 million, amounting to 1% of its total 13F portfolio. The second largest stake is held by Citadel Investment Group, led by Ken Griffin, holding a $67.5 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions contain John Overdeck and David Siegel's Two Sigma Advisors, Renaissance Technologies and Anand Parekh's Alyeska Investment Group. In terms of the portfolio weights assigned to each position Archon Capital Management allocated the biggest weight to New Relic Inc (NYSE:NEWR), around 5.52% of its 13F portfolio. Potrero Capital Research is also relatively very bullish on the stock, dishing out 3.38 percent of its 13F equity portfolio to NEWR.
Consequently, key money managers were breaking ground themselves. Tiger Global Management, managed by Chase Coleman, initiated the most valuable position in New Relic Inc (NYSE:NEWR). Tiger Global Management had $179.4 million invested in the company at the end of the quarter. Josh Resnick's Jericho Capital Asset Management also initiated a $31 million position during the quarter. The other funds with new positions in the stock are Constantinos J. Christofilis's Archon Capital Management, Charles Davidson and Joseph Jacobs's Wexford Capital, and Josh Goldberg's G2 Investment Partners Management.
Let's now take a look at hedge fund activity in other stocks similar to New Relic Inc (NYSE:NEWR). We will take a look at Two Harbors Investment Corp (NYSE:TWO), LHC Group, Inc. (NASDAQ:LHCG), Chegg Inc (NYSE:CHGG), and LivaNova PLC (NASDAQ:LIVN). All of these stocks' market caps resemble NEWR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TWO,13,64248,0 LHCG,27,112140,1 CHGG,32,337398,6 LIVN,13,153754,-3 Average,21.25,166885,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $167 million. That figure was $519 million in NEWR's case. Chegg Inc (NYSE:CHGG) is the most popular stock in this table. On the other hand Two Harbors Investment Corp (NYSE:TWO) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks New Relic Inc (NYSE:NEWR) 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. Unfortunately NEWR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on NEWR were disappointed as the stock returned -16% so far in 2019 (through 12/23) 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 65 percent of these stocks already outperformed the market in 2019. 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.