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Hedge Funds Have Never Been This Bullish On NMI Holdings Inc (NMIH)

Reymerlyn Martin

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 NMI Holdings Inc (NASDAQ:NMIH) and determine whether hedge funds had an edge regarding this stock.

NMI Holdings Inc (NASDAQ:NMIH) was in 30 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 24. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. NMIH shareholders have witnessed an increase in hedge fund sentiment recently. There were 23 hedge funds in our database with NMIH positions at the end of the first quarter. Our calculations also showed that NMIH 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.

Howard Marks OAKTREE CAPITAL MANAGEMENT
Howard Marks OAKTREE CAPITAL MANAGEMENT

Howard Marks of Oaktree Capital Management

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 peek at the recent hedge fund action regarding NMI Holdings Inc (NASDAQ:NMIH).

What have hedge funds been doing with NMI Holdings Inc (NASDAQ:NMIH)?

At Q2's end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 30% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in NMIH a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Oaktree Capital Management held the most valuable stake in NMI Holdings Inc (NASDAQ:NMIH), which was worth $70.8 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $18.5 million worth of shares. Driehaus Capital, Millennium Management, and Berylson Capital Partners 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 Berylson Capital Partners allocated the biggest weight to NMI Holdings Inc (NASDAQ:NMIH), around 5.38% of its 13F portfolio. Oaktree Capital Management is also relatively very bullish on the stock, earmarking 1.57 percent of its 13F equity portfolio to NMIH.

Now, key money managers were breaking ground themselves. Driehaus Capital, managed by Richard Driehaus, created the biggest position in NMI Holdings Inc (NASDAQ:NMIH). Driehaus Capital had $15.4 million invested in the company at the end of the quarter. Doug Silverman and Alexander Klabin's Senator Investment Group also initiated a $4.8 million position during the quarter. The following funds were also among the new NMIH investors: David Rodriguez-Fraile's BlueMar Capital Management, Carl Tiedemann and Michael Tiedemann's TIG Advisors, and Emanuel J. Friedman's EJF Capital.

Let's go over hedge fund activity in other stocks similar to NMI Holdings Inc (NASDAQ:NMIH). We will take a look at WesBanco, Inc. (NASDAQ:WSBC), Cortexyme, Inc. (NASDAQ:CRTX), Bloom Energy Corporation (NYSE:BE), First Financial Bancorp (NASDAQ:FFBC), Odonate Therapeutics, Inc. (NASDAQ:ODT), Sprout Social, Inc. (NASDAQ:SPT), and BRP Group, Inc. (NASDAQ:BRP). This group of stocks' market valuations resemble NMIH's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WSBC,13,44583,4 CRTX,6,21086,0 BE,16,110425,6 FFBC,13,19498,5 ODT,16,717520,3 SPT,19,129811,3 BRP,16,58478,14 Average,14.1,157343,5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.1 hedge funds with bullish positions and the average amount invested in these stocks was $157 million. That figure was $173 million in NMIH's case. Sprout Social, Inc. (NASDAQ:SPT) is the most popular stock in this table. On the other hand Cortexyme, Inc. (NASDAQ:CRTX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks NMI Holdings Inc (NASDAQ:NMIH) is more popular among hedge funds. Our overall hedge fund sentiment score for NMIH is 90. 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. 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 returned 23.8% in 2020 through September 14th but still managed to beat the market by 17.6 percentage points. Hedge funds were also right about betting on NMIH as the stock returned 17.1% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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