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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Lizhi Inc. (NASDAQ:LIZI)? The smart money sentiment can provide an answer to this question.
Is LIZI a good stock to buy? Hedge fund interest in Lizhi Inc. (NASDAQ:LIZI) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that LIZI isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). 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 iCAD Inc (NASDAQ:ICAD), First Community Bancshares Inc (NASDAQ:FCBC), and Mercantile Bank Corp. (NASDAQ:MBWM) to gather more data points.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Donald Sussman of Paloma Partners
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. Now we're going to view the recent hedge fund action encompassing Lizhi Inc. (NASDAQ:LIZI).
Do Hedge Funds Think LIZI Is A Good Stock To Buy Now?
At the end of March, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LIZI over the last 23 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.
The largest stake in Lizhi Inc. (NASDAQ:LIZI) was held by Paloma Partners, which reported holding $0.5 million worth of stock at the end of December. It was followed by Citadel Investment Group with a $0.4 million position. The only other hedge fund that is bullish on the company was Millennium Management.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Two Sigma Advisors. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Paloma Partners).
Let's check out hedge fund activity in other stocks similar to Lizhi Inc. (NASDAQ:LIZI). We will take a look at iCAD Inc (NASDAQ:ICAD), First Community Bancshares Inc (NASDAQ:FCBC), Mercantile Bank Corp. (NASDAQ:MBWM), AVROBIO, Inc. (NASDAQ:AVRO), Miller Industries, Inc. (NYSE:MLR), Terns Pharmaceuticals, Inc. (NASDAQ:TERN), and Avadel Pharmaceuticals plc (NASDAQ:AVDL). This group of stocks' market valuations match LIZI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ICAD,15,88505,-1 FCBC,5,7882,-1 MBWM,6,28434,2 AVRO,10,105673,-6 MLR,7,81239,-2 TERN,14,265229,14 AVDL,15,147643,0 Average,10.3,103515,0.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.3 hedge funds with bullish positions and the average amount invested in these stocks was $104 million. That figure was $1 million in LIZI's case. iCAD Inc (NASDAQ:ICAD) is the most popular stock in this table. On the other hand First Community Bancshares Inc (NASDAQ:FCBC) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Lizhi Inc. (NASDAQ:LIZI) is even less popular than FCBC. Our overall hedge fund sentiment score for LIZI is 35. 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. Hedge funds dodged a bullet by taking a bearish stance towards LIZI. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.2% in 2021 through June 11th but managed to beat the market again by 3.3 percentage points. Unfortunately LIZI wasn't nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); LIZI investors were disappointed as the stock returned -25.4% since the end of the first quarter (through 6/11) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.