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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 Lumentum Holdings Inc (NASDAQ:LITE) and determine whether hedge funds had an edge regarding this stock.
Lumentum Holdings Inc (NASDAQ:LITE) has seen an increase in activity from the world's largest hedge funds of late. Lumentum Holdings Inc (NASDAQ:LITE) was in 42 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 37. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LITE 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.
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.
Philip Hempleman of Ardsley Partners
At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let's review the recent hedge fund action regarding Lumentum Holdings Inc (NASDAQ:LITE).
How are hedge funds trading Lumentum Holdings Inc (NASDAQ:LITE)?
At the end of the second quarter, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from one quarter earlier. On the other hand, there were a total of 30 hedge funds with a bullish position in LITE a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
The largest stake in Lumentum Holdings Inc (NASDAQ:LITE) was held by Renaissance Technologies, which reported holding $127.5 million worth of stock at the end of September. It was followed by Holocene Advisors with a $94.9 million position. Other investors bullish on the company included Fisher Asset Management, Millennium Management, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Boardman Bay Capital Management allocated the biggest weight to Lumentum Holdings Inc (NASDAQ:LITE), around 7% of its 13F portfolio. Divisar Capital is also relatively very bullish on the stock, designating 4.51 percent of its 13F equity portfolio to LITE.
As one would reasonably expect, specific money managers were leading the bulls' herd. Alyeska Investment Group, managed by Anand Parekh, created the most outsized position in Lumentum Holdings Inc (NASDAQ:LITE). Alyeska Investment Group had $28.7 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners also made a $14.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Philip Hempleman's Ardsley Partners, Michael Gelband's ExodusPoint Capital, and Michael Rockefeller and KarláKroeker's Woodline Partners.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Lumentum Holdings Inc (NASDAQ:LITE) but similarly valued. These stocks are Smartsheet Inc. (NYSE:SMAR), SYNNEX Corporation (NYSE:SNX), OGE Energy Corp. (NYSE:OGE), Syneos Health, Inc. (NASDAQ:SYNH), Athene Holding Ltd. (NYSE:ATH), Elbit Systems Ltd. (NASDAQ:ESLT), and Robert Half International Inc. (NYSE:RHI). This group of stocks' market values resemble LITE's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SMAR,47,2024773,6 SNX,24,502344,0 OGE,25,174922,4 SYNH,29,354964,7 ATH,33,765101,1 ESLT,4,11024,-2 RHI,28,300880,2 Average,27.1,590573,2.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.1 hedge funds with bullish positions and the average amount invested in these stocks was $591 million. That figure was $678 million in LITE's case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand Elbit Systems Ltd. (NASDAQ:ESLT) is the least popular one with only 4 bullish hedge fund positions. Lumentum Holdings Inc (NASDAQ:LITE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LITE is 84.2. 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 LITE wasn't nearly as popular as these 10 stocks and hedge funds that were betting on LITE were disappointed as the stock returned 5.6% 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.