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 Acacia Communications, Inc. (NASDAQ:ACIA) and determine whether hedge funds had an edge regarding this stock.
Is Acacia Communications, Inc. (NASDAQ:ACIA) a healthy stock for your portfolio? Investors who are in the know were turning bullish. The number of bullish hedge fund positions inched up by 12 lately. Acacia Communications, Inc. (NASDAQ:ACIA) was in 34 hedge funds' portfolios at the end of June. The all time high for this statistics is 31. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ACIA 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.
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 S&P 500 ETFs by more than 56 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. 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.
Matthew Halbower of Pentwater Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we're going to take a gander at the recent hedge fund action encompassing Acacia Communications, Inc. (NASDAQ:ACIA).
How are hedge funds trading Acacia Communications, Inc. (NASDAQ:ACIA)?
Heading into the third quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 55% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ACIA over the last 20 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Alpine Associates, managed by Robert Emil Zoellner, holds the number one position in Acacia Communications, Inc. (NASDAQ:ACIA). Alpine Associates has a $147.8 million position in the stock, comprising 8.5% of its 13F portfolio. The second largest stake is held by Magnetar Capital, led by Alec Litowitz and Ross Laser, holding a $115.7 million position; 3.4% of its 13F portfolio is allocated to the stock. Some other peers with similar optimism contain Renaissance Technologies, Ken Griffin's Citadel Investment Group and Matthew Halbower's Pentwater Capital Management. In terms of the portfolio weights assigned to each position Melqart Asset Management allocated the biggest weight to Acacia Communications, Inc. (NASDAQ:ACIA), around 9.08% of its 13F portfolio. Alpine Associates is also relatively very bullish on the stock, earmarking 8.51 percent of its 13F equity portfolio to ACIA.
Now, some big names were leading the bulls' herd. Melqart Asset Management, managed by Michel Massoud, initiated the largest position in Acacia Communications, Inc. (NASDAQ:ACIA). Melqart Asset Management had $73.3 million invested in the company at the end of the quarter. Simon Sadler's Segantii Capital also made a $21.3 million investment in the stock during the quarter. The other funds with brand new ACIA positions are Dmitry Balyasny's Balyasny Asset Management, Louis Bacon's Moore Global Investments, and David Simon's Twin Capital Management.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Acacia Communications, Inc. (NASDAQ:ACIA) but similarly valued. We will take a look at Cimarex Energy Co (NYSE:XEC), Navistar International Corp (NYSE:NAV), STAAR Surgical Company (NASDAQ:STAA), Goosehead Insurance, Inc. (NASDAQ:GSHD), FirstCash, Inc. (NASDAQ:FCFS), Varonis Systems Inc (NASDAQ:VRNS), and Insmed Incorporated (NASDAQ:INSM). This group of stocks' market values are similar to ACIA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XEC,39,556800,4 NAV,33,1245849,-3 STAA,20,920886,-1 GSHD,15,114944,4 FCFS,22,144073,6 VRNS,28,604539,8 INSM,30,613700,10 Average,26.7,600113,4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $600 million. That figure was $960 million in ACIA's case. Cimarex Energy Co (NYSE:XEC) is the most popular stock in this table. On the other hand Goosehead Insurance, Inc. (NASDAQ:GSHD) is the least popular one with only 15 bullish hedge fund positions. Acacia Communications, Inc. (NASDAQ:ACIA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ACIA is 79.6. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately ACIA wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ACIA were disappointed as the stock returned 0.4% during the same time period 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.