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Hedge Funds Are Selling Harmonic Inc (HLIT)

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Debasis Saha
·6 min read
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In this article we will take a look at whether hedge funds think Harmonic Inc (NASDAQ:HLIT) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Harmonic Inc (NASDAQ:HLIT) a buy, sell, or hold? Investors who are in the know are getting less bullish. The number of long hedge fund positions dropped by 3 lately. Our calculations also showed that HLIT isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

[caption id="attachment_339344" align="aligncenter" width="400"]

William Martin Raging Capital Management
William Martin Raging Capital Management

William Martin of Raging Capital Management[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology's influence will go beyond online payments. So, we are checking out this futurist's moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's take a gander at the fresh hedge fund action surrounding Harmonic Inc (NASDAQ:HLIT).

Hedge fund activity in Harmonic Inc (NASDAQ:HLIT)

At Q1's end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HLIT over the last 18 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Is HLIT A Good Stock To Buy?
Is HLIT A Good Stock To Buy?

Among these funds, Scopia Capital held the most valuable stake in Harmonic Inc (NASDAQ:HLIT), which was worth $35.7 million at the end of the third quarter. On the second spot was Divisar Capital which amassed $6.7 million worth of shares. Manatuck Hill Partners, Raging Capital Management, and Royce & Associates 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 Manatuck Hill Partners allocated the biggest weight to Harmonic Inc (NASDAQ:HLIT), around 3.39% of its 13F portfolio. Scopia Capital is also relatively very bullish on the stock, designating 3.27 percent of its 13F equity portfolio to HLIT.

Due to the fact that Harmonic Inc (NASDAQ:HLIT) has faced falling interest from hedge fund managers, it's easy to see that there were a few money managers that elected to cut their full holdings heading into Q4. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the largest position of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $1.8 million in stock. Michael Gelband's fund, ExodusPoint Capital, also dropped its stock, about $0.3 million worth. These transactions are interesting, as total hedge fund interest dropped by 3 funds heading into Q4.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Harmonic Inc (NASDAQ:HLIT) but similarly valued. We will take a look at Ultra Clean Holdings Inc (NASDAQ:UCTT), Apogee Enterprises, Inc. (NASDAQ:APOG), Aegion Corp (NASDAQ:AEGN), and Frequency Therapeutics, Inc. (NASDAQ:FREQ). This group of stocks' market caps are closest to HLIT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UCTT,24,74439,5 APOG,13,54302,-3 AEGN,7,16746,0 FREQ,8,98307,-1 Average,13,60949,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $61 million. That figure was $61 million in HLIT's case. Ultra Clean Holdings Inc (NASDAQ:UCTT) is the most popular stock in this table. On the other hand Aegion Corp (NASDAQ:AEGN) is the least popular one with only 7 bullish hedge fund positions. Harmonic Inc (NASDAQ:HLIT) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately HLIT wasn't nearly as popular as these 10 stocks and hedge funds that were betting on HLIT were disappointed as the stock returned -18.9% 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.

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