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Is Norwegian Cruise Line Holdings Ltd (NCLH) Going to Burn These Hedge Funds?

Debasis Saha
·6 mins read

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 Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) and determine whether hedge funds had an edge regarding this stock.

Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) was in 28 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 42. NCLH has experienced an increase in activity from the world's largest hedge funds of late. There were 20 hedge funds in our database with NCLH holdings at the end of March. Our calculations also showed that NCLH 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). Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Rogers Ariel Investments
John Rogers Ariel Investments

John Rogers of Ariel Investments

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. 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 website to get excerpts of these letters in your inbox. Keeping this in mind let's check out the new hedge fund action regarding Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH).

How are hedge funds trading Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH)?

Heading into the third quarter of 2020, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 40% from one quarter earlier. On the other hand, there were a total of 35 hedge funds with a bullish position in NCLH a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is NCLH A Good Stock To Buy?
Is NCLH A Good Stock To Buy?

Among these funds, Millennium Management held the most valuable stake in Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), which was worth $35.6 million at the end of the third quarter. On the second spot was MIG Capital which amassed $32.1 million worth of shares. Citadel Investment Group, Citadel Investment Group, 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 MIG Capital allocated the biggest weight to Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), around 3.3% of its 13F portfolio. White Square Capital is also relatively very bullish on the stock, dishing out 1.68 percent of its 13F equity portfolio to NCLH.

As one would reasonably expect, some big names have jumped into Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) headfirst. Millennium Management, managed by Israel Englander, initiated the most valuable position in Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH). Millennium Management had $35.6 million invested in the company at the end of the quarter. Richard Merage's MIG Capital also made a $32.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Anand Parekh's Alyeska Investment Group, Dmitry Balyasny's Balyasny Asset Management, and Joe DiMenna's ZWEIG DIMENNA PARTNERS.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) but similarly valued. We will take a look at Youdao, Inc. (NYSE:DAO), Healthequity Inc (NASDAQ:HQY), DXC Technology Company (NYSE:DXC), Jefferies Financial Group Inc. (NYSE:JEF), Ashland Global Holdings Inc.. (NYSE:ASH), TerraForm Power Inc (NASDAQ:TERP), and Exponent, Inc. (NASDAQ:EXPO). This group of stocks' market valuations match NCLH's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DAO,13,381255,7 HQY,18,164752,-1 DXC,40,529806,-1 JEF,37,586275,7 ASH,32,976347,0 TERP,21,235830,4 EXPO,19,92487,2 Average,25.7,423822,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.7 hedge funds with bullish positions and the average amount invested in these stocks was $424 million. That figure was $171 million in NCLH's case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand Youdao, Inc. (NYSE:DAO) is the least popular one with only 13 bullish hedge fund positions. Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NCLH is 57.8. 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. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately NCLH wasn't nearly as popular as these 10 stocks and hedge funds that were betting on NCLH were disappointed as the stock returned 1.2% 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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