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NetApp Inc. (NTAP): Are Hedge Funds Right About This Stock?

Abigail Fisher

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in October due to various reasons. Nevertheless, the data show elite investors' consensus picks have done well on average over the long-term. The top 30 S&P 500 stocks among hedge funds at the end of September 2018 returned an average of 6.7% through November 15th whereas the S&P 500 Index ETF gained only 2.6% during the same period. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at NetApp Inc. (NASDAQ:NTAP) from the perspective of those elite funds.

NetApp Inc. (NASDAQ:NTAP) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 27 hedge funds' portfolios at the end of the third quarter of 2018. 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 Aptiv PLC (NYSE:APTV), Coca-Cola European Partners plc (NYSE:CCE), and Edison International (NYSE:EIX) to gather more data points.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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.

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Let's analyze the latest hedge fund action surrounding NetApp Inc. (NASDAQ:NTAP).

What does the smart money think about NetApp Inc. (NASDAQ:NTAP)?

Heading into the fourth quarter of 2018, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, representing no change from the previous quarter. The graph below displays the number of hedge funds with bullish position in NTAP over the last 13 quarters. With hedge funds' sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

NTAP_dec2018

More specifically, Renaissance Technologies was the largest shareholder of NetApp Inc. (NASDAQ:NTAP), with a stake worth $335.9 million reported as of the end of September. Trailing Renaissance Technologies was Two Sigma Advisors, which amassed a stake valued at $134.8 million. D E Shaw, AQR Capital Management, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that NetApp Inc. (NASDAQ:NTAP) has faced declining sentiment from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of hedgies that slashed their entire stakes in the third quarter. At the top of the heap, Richard Barrera's Roystone Capital Partners sold off the biggest position of all the hedgies watched by Insider Monkey, valued at close to $16 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund cut about $5.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as NetApp Inc. (NASDAQ:NTAP) but similarly valued. These stocks are Aptiv PLC (NYSE:APTV), Coca-Cola European Partners plc (NYSE:CCE), Edison International (NYSE:EIX), and TELUS Corporation (NYSE:TU). All of these stocks' market caps match NTAP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APTV,43,1626371,0 CCE,23,476588,1 EIX,25,1198233,-3 TU,12,295888,4 Average,25.75,899270,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $899 million. That figure was $886 million in NTAP's case. Aptiv PLC (NYSE:APTV) is the most popular stock in this table. On the other hand TELUS Corporation (NYSE:TU) is the least popular one with only 12 bullish hedge fund positions. NetApp Inc. (NASDAQ:NTAP) 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. In this regard APTV might be a better candidate to consider a long position.

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

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