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Hedge Funds Are Dumping NIO Limited (NIO)

Abigail Fisher

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in NIO Limited (NYSE:NIO)? The smart money sentiment can provide an answer to this question.

NIO Limited (NYSE:NIO) was in 13 hedge funds' portfolios at the end of the third quarter of 2019. NIO shareholders have witnessed a decrease in support from the world's most elite money managers of late. There were 14 hedge funds in our database with NIO holdings at the end of the previous quarter. Our calculations also showed that NIO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_758500" align="aligncenter" width="450"] Daniel Gold of QVT Financial[/caption]

Daniel Gold QVT Financial

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the recent hedge fund action regarding NIO Limited (NYSE:NIO).

Hedge fund activity in NIO Limited (NYSE:NIO)

At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the second quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in NIO a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Among these funds, Hillhouse Capital Management held the most valuable stake in NIO Limited (NYSE:NIO), which was worth $20.9 million at the end of the third quarter. On the second spot was Hound Partners which amassed $3 million worth of shares. QVT Financial, Citadel Investment Group, and HBK Investments 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 QVT Financial allocated the biggest weight to NIO Limited (NYSE:NIO), around 0.51% of its 13F portfolio. Tenzing Global Investors is also relatively very bullish on the stock, designating 0.32 percent of its 13F equity portfolio to NIO.

Because NIO Limited (NYSE:NIO) has faced a decline in interest from the entirety of the hedge funds we track, it's safe to say that there exists a select few fund managers that decided to sell off their positions entirely heading into Q4. At the top of the heap, Simon Sadler's Segantii Capital cut the largest stake of the "upper crust" of funds followed by Insider Monkey, worth about $7.3 million in stock. Nick Niell's fund, Arrowgrass Capital Partners, also sold off its stock, about $7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds heading into Q4.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as NIO Limited (NYSE:NIO) but similarly valued. These stocks are Bloomin' Brands Inc (NASDAQ:BLMN), Provident Financial Services, Inc. (NYSE:PFS), Mueller Industries, Inc. (NYSE:MLI), and Comfort Systems USA, Inc. (NYSE:FIX). This group of stocks' market values are closest to NIO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BLMN,18,250574,-4 PFS,11,55738,0 MLI,18,185815,3 FIX,21,124284,-2 Average,17,154103,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $31 million in NIO's case. Comfort Systems USA, Inc. (NYSE:FIX) is the most popular stock in this table. On the other hand Provident Financial Services, Inc. (NYSE:PFS) is the least popular one with only 11 bullish hedge fund positions. NIO Limited (NYSE:NIO) is not the least popular stock in this group but hedge fund interest is still below 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. A small number of hedge funds were also right about betting on NIO as the stock returned 45.5% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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