Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first quarter, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first quarter still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Veeco Instruments Inc. (NASDAQ:VECO) changed recently.
Hedge fund interest in Veeco Instruments Inc. (NASDAQ:VECO) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare VECO to other stocks including AquaVenture Holdings Limited (NYSE:WAAS), Kimball International Inc (NASDAQ:KBAL), and Zymeworks Inc. (NYSE:ZYME) to get a better sense of its popularity.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let's analyze the key hedge fund action encompassing Veeco Instruments Inc. (NASDAQ:VECO).
How have hedgies been trading Veeco Instruments Inc. (NASDAQ:VECO)?
At Q1's end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2018. By comparison, 8 hedge funds held shares or bullish call options in VECO a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
More specifically, Lynrock Lake was the largest shareholder of Veeco Instruments Inc. (NASDAQ:VECO), with a stake worth $71.3 million reported as of the end of March. Trailing Lynrock Lake was D E Shaw, which amassed a stake valued at $12.2 million. Fisher Asset Management, Royce & Associates, and Carlson Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as Veeco Instruments Inc. (NASDAQ:VECO) has faced declining sentiment from the smart money, we can see that there lies a certain "tier" of fund managers who were dropping their full holdings last quarter. It's worth mentioning that Gavin Saitowitz and Cisco J. del Valle's Springbok Capital dropped the largest stake of the "upper crust" of funds watched by Insider Monkey, worth an estimated $0.3 million in stock. Jeffrey Talpins's fund, Element Capital Management, also dropped its stock, about $0.1 million worth. These transactions 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 review hedge fund activity in other stocks - not necessarily in the same industry as Veeco Instruments Inc. (NASDAQ:VECO) but similarly valued. We will take a look at AquaVenture Holdings Limited (NYSE:WAAS), Kimball International Inc (NASDAQ:KBAL), Zymeworks Inc. (NYSE:ZYME), and Rosetta Stone Inc (NYSE:RST). This group of stocks' market caps are similar to VECO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WAAS,10,21356,-1 KBAL,12,88420,2 ZYME,14,120820,3 RST,19,126725,7 Average,13.75,89330,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $89 million. That figure was $123 million in VECO's case. Rosetta Stone Inc (NYSE:RST) is the most popular stock in this table. On the other hand AquaVenture Holdings Limited (NYSE:WAAS) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Veeco Instruments Inc. (NASDAQ:VECO) is even less popular than WAAS. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on VECO, though not to the same extent, as the stock returned 4% during the same time frame and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.