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 Momo Inc (NASDAQ:MOMO) and determine whether hedge funds had an edge regarding this stock.
Is Momo Inc (NASDAQ:MOMO) a marvelous investment today? Investors who are in the know were taking a bullish view. The number of long hedge fund bets rose by 9 lately. Momo Inc (NASDAQ:MOMO) was in 34 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 45. Our calculations also showed that MOMO 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). There were 25 hedge funds in our database with MOMO positions at the end of the first quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.
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 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
James Dinan of York 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. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. 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 view the new hedge fund action encompassing Momo Inc (NASDAQ:MOMO).
What have hedge funds been doing with Momo Inc (NASDAQ:MOMO)?
At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 36% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in MOMO a year ago. With the smart money's capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Momo Inc (NASDAQ:MOMO), which was worth $245.2 million at the end of the third quarter. On the second spot was Platinum Asset Management which amassed $78.8 million worth of shares. Arrowstreet Capital, Kylin Management, and Millennium Management 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 Kylin Management allocated the biggest weight to Momo Inc (NASDAQ:MOMO), around 10.55% of its 13F portfolio. Dalton Investments is also relatively very bullish on the stock, earmarking 4.97 percent of its 13F equity portfolio to MOMO.
Now, some big names were breaking ground themselves. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, created the most valuable position in Momo Inc (NASDAQ:MOMO). LMR Partners had $19.8 million invested in the company at the end of the quarter. Hyder Ahmad's Broad Peak Investment Holdings also made a $17.9 million investment in the stock during the quarter. The following funds were also among the new MOMO investors: Noam Gottesman's GLG Partners, Run Ye, Junji Takegami and Hoyon Hwang's Tiger Pacific Capital, and James Dinan's York Capital Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Momo Inc (NASDAQ:MOMO) but similarly valued. These stocks are Cogent Communications Holdings Inc. (NASDAQ:CCOI), Parsons Corporation (NYSE:PSN), Texas Roadhouse Inc (NASDAQ:TXRH), Harley-Davidson, Inc. (NYSE:HOG), Halozyme Therapeutics, Inc. (NASDAQ:HALO), PS Business Parks Inc (NYSE:PSB), and Emcor Group Inc (NYSE:EME). This group of stocks' market caps resemble MOMO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CCOI,28,464857,1 PSN,15,81243,0 TXRH,25,233801,-2 HOG,30,392806,13 HALO,26,246712,3 PSB,20,123459,3 EME,29,191491,5 Average,24.7,247767,3.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.7 hedge funds with bullish positions and the average amount invested in these stocks was $248 million. That figure was $586 million in MOMO's case. Harley-Davidson, Inc. (NYSE:HOG) is the most popular stock in this table. On the other hand Parsons Corporation (NYSE:PSN) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Momo Inc (NASDAQ:MOMO) is more popular among hedge funds. Our overall hedge fund sentiment score for MOMO is 82.7. 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 gained 33% in 2020 through the end of August and still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on MOMO, though not to the same extent, as the stock returned 16.7% since the end of June and outperformed the market as well.
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Disclosure: None. This article was originally published at Insider Monkey.