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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 EMCORE Corporation (NASDAQ:EMKR) and determine whether hedge funds had an edge regarding this stock.
Hedge fund interest in EMCORE Corporation (NASDAQ:EMKR) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Pluristem Therapeutics Inc. (NASDAQ:PSTI), United-Guardian, Inc. (NASDAQ:UG), and Guaranty Federal Bancshares, Inc. (NASDAQ:GFED) to gather more data points. Our calculations also showed that EMKR 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.
In the eyes of most market participants, hedge funds are assumed to be unimportant, outdated financial vehicles of the past. While there are greater than 8000 funds with their doors open at present, We hone in on the moguls of this group, about 850 funds. Most estimates calculate that this group of people control most of the hedge fund industry's total asset base, and by shadowing their top equity investments, Insider Monkey has brought to light many investment strategies that have historically beaten the broader indices. Insider Monkey's flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .
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Eric Singer of VIEX Capital Advisors[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. 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. Keeping this in mind let's analyze the new hedge fund action surrounding EMCORE Corporation (NASDAQ:EMKR).
How have hedgies been trading EMCORE Corporation (NASDAQ:EMKR)?
At Q1's end, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in EMKR over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Cannell Capital held the most valuable stake in EMCORE Corporation (NASDAQ:EMKR), which was worth $6.3 million at the end of the third quarter. On the second spot was VIEX Capital Advisors which amassed $6 million worth of shares. Solas Capital Management, Renaissance Technologies, and Ariel 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 VIEX Capital Advisors allocated the biggest weight to EMCORE Corporation (NASDAQ:EMKR), around 7.26% of its 13F portfolio. Solas Capital Management is also relatively very bullish on the stock, setting aside 5.72 percent of its 13F equity portfolio to EMKR.
Because EMCORE Corporation (NASDAQ:EMKR) has experienced bearish sentiment from hedge fund managers, we can see that there is a sect of funds who were dropping their entire stakes last quarter. It's worth mentioning that Matthew Drapkin and Steven R. Becker's Becker Drapkin Management dropped the largest investment of all the hedgies tracked by Insider Monkey, valued at about $3.6 million in stock, and Mark Broach's Manatuck Hill Partners was right behind this move, as the fund sold off about $0.1 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as EMCORE Corporation (NASDAQ:EMKR) but similarly valued. These stocks are Pluristem Therapeutics Inc. (NASDAQ:PSTI), United-Guardian, Inc. (NASDAQ:UG), Guaranty Federal Bancshares, Inc. (NASDAQ:GFED), and Northern Technologies International Corp (NASDAQ:NTIC). This group of stocks' market caps resemble EMKR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PSTI,5,1909,3 UG,2,5998,0 GFED,2,2234,0 NTIC,4,4491,0 Average,3.25,3658,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 3.25 hedge funds with bullish positions and the average amount invested in these stocks was $4 million. That figure was $26 million in EMKR's case. Pluristem Therapeutics Inc. (NASDAQ:PSTI) is the most popular stock in this table. On the other hand United-Guardian, Inc. (NASDAQ:UG) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks EMCORE Corporation (NASDAQ:EMKR) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on EMKR as the stock returned 42% in Q2 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.