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At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Novanta Inc. (NASDAQ:NOVT) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Novanta Inc. (NASDAQ:NOVT) investors should be aware of an increase in hedge fund sentiment of late. Novanta Inc. (NASDAQ:NOVT) was in 18 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 19. Our calculations also showed that NOVT 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).
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 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.
Ian Wace of Marshall Wace
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. With all of this in mind let's review the recent hedge fund action regarding Novanta Inc. (NASDAQ:NOVT).
How are hedge funds trading Novanta Inc. (NASDAQ:NOVT)?
At Q2's end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 80% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in NOVT a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Paradice Investment Management, managed by David Paradice, holds the largest position in Novanta Inc. (NASDAQ:NOVT). Paradice Investment Management has a $66.4 million position in the stock, comprising 5% of its 13F portfolio. Coming in second is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $12 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining peers that are bullish comprise Jay Genzer's Thames Capital Management, Renaissance Technologies and Paul Marshall and Ian Wace's Marshall Wace LLP. In terms of the portfolio weights assigned to each position Paradice Investment Management allocated the biggest weight to Novanta Inc. (NASDAQ:NOVT), around 5% of its 13F portfolio. Thames Capital Management is also relatively very bullish on the stock, setting aside 2.56 percent of its 13F equity portfolio to NOVT.
As industrywide interest jumped, some big names were breaking ground themselves. Paradice Investment Management, managed by David Paradice, created the most outsized position in Novanta Inc. (NASDAQ:NOVT). Paradice Investment Management had $66.4 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also made a $12 million investment in the stock during the quarter. The other funds with brand new NOVT positions are Paul Marshall and Ian Wace's Marshall Wace LLP, Greg Eisner's Engineers Gate Manager, and Hoon Kim's Quantinno Capital.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Novanta Inc. (NASDAQ:NOVT) but similarly valued. These stocks are Portland General Electric Company (NYSE:POR), Perspecta Inc. (NYSE:PRSP), BRP Inc. (NASDAQ:DOOO), Curtiss-Wright Corp. (NYSE:CW), YETI Holdings, Inc. (NYSE:YETI), Flowserve Corporation (NYSE:FLS), and Grocery Outlet Holding Corp. (NASDAQ:GO). This group of stocks' market valuations are closest to NOVT's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position POR,21,164563,-2 PRSP,46,653988,14 DOOO,14,149741,4 CW,26,257924,5 YETI,22,155265,2 FLS,30,251403,1 GO,19,137772,2 Average,25.4,252951,3.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.4 hedge funds with bullish positions and the average amount invested in these stocks was $253 million. That figure was $104 million in NOVT's case. Perspecta Inc. (NYSE:PRSP) is the most popular stock in this table. On the other hand BRP Inc. (NASDAQ:DOOO) is the least popular one with only 14 bullish hedge fund positions. Novanta Inc. (NASDAQ:NOVT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NOVT is 44.7. 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 negative signal and 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 surpassed the market by 19.3 percentage points. Unfortunately NOVT wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); NOVT investors were disappointed as the stock returned -1.3% in the third quarter 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.