How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding 3D Systems Corporation (NYSE:DDD) and determine whether hedge funds had an edge regarding this stock.
3D Systems Corporation (NYSE:DDD) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 18 hedge funds' portfolios at the end of June. Our calculations also showed that DDD isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare DDD to other stocks including Neenah Inc. (NYSE:NP), i3 Verticals, Inc. (NASDAQ:IIIV), and OraSure Technologies, Inc. (NASDAQ:OSUR) to get a better sense of its popularity. Video: Watch our video about the top 5 most popular hedge fund stocks.
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' 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
Philippe Laffont of Coatue Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's take a look at the latest hedge fund action encompassing 3D Systems Corporation (NYSE:DDD).
Hedge fund activity in 3D Systems Corporation (NYSE:DDD)
At second quarter's end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in DDD a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, D E Shaw, managed by D. E. Shaw, holds the number one position in 3D Systems Corporation (NYSE:DDD). D E Shaw has a $29 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is Coatue Management, led by Philippe Laffont, holding a $6.7 million position; 0.1% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors with similar optimism encompass Chuck Royce's Royce & Associates, Renaissance Technologies and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position GMT Capital allocated the biggest weight to 3D Systems Corporation (NYSE:DDD), around 0.09% of its 13F portfolio. Coatue Management is also relatively very bullish on the stock, designating 0.06 percent of its 13F equity portfolio to DDD.
Due to the fact that 3D Systems Corporation (NYSE:DDD) has faced a decline in interest from hedge fund managers, logic holds that there is a sect of hedgies that elected to cut their full holdings in the second quarter. At the top of the heap, Jinghua Yan's TwinBeech Capital sold off the biggest stake of the "upper crust" of funds followed by Insider Monkey, worth about $0.3 million in stock. Minhua Zhang's fund, Weld Capital Management, also said goodbye to its stock, about $0.3 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to 3D Systems Corporation (NYSE:DDD). We will take a look at Neenah Inc. (NYSE:NP), i3 Verticals, Inc. (NASDAQ:IIIV), OraSure Technologies, Inc. (NASDAQ:OSUR), Morphic Holding, Inc. (NASDAQ:MORF), TechTarget Inc (NASDAQ:TTGT), Zynex, Inc. (NASDAQ:ZYXI), and National Bank Holdings Corp (NYSE:NBHC). This group of stocks' market values are similar to DDD's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NP,13,15298,0 IIIV,12,61006,1 OSUR,21,141474,2 MORF,7,101532,0 TTGT,12,64878,-2 ZYXI,9,12425,2 NBHC,5,45671,-3 Average,11.3,63183,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.3 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $51 million in DDD's case. OraSure Technologies, Inc. (NASDAQ:OSUR) is the most popular stock in this table. On the other hand National Bank Holdings Corp (NYSE:NBHC) is the least popular one with only 5 bullish hedge fund positions. 3D Systems Corporation (NYSE:DDD) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DDD is 74. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately DDD wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DDD were disappointed as the stock returned -29.8% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.