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Were Hedge Funds Right About Souring On NetGear, Inc. (NTGR)?

Asma UL Husna

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards NetGear, Inc. (NASDAQ:NTGR) and determine whether hedge funds skillfully traded this stock.

NetGear, Inc. (NASDAQ:NTGR) was in 13 hedge funds' portfolios at the end of March. NTGR investors should pay attention to a decrease in support from the world's most elite money managers lately. There were 16 hedge funds in our database with NTGR holdings at the end of the previous quarter. Our calculations also showed that NTGR isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

At the moment there are a lot of metrics investors have at their disposal to analyze stocks. A couple of the less utilized metrics are hedge fund and insider trading indicators. We have shown that, historically, those who follow the best picks of the best investment managers can trounce the broader indices by a superb margin (see the details here).

[caption id="attachment_189632" align="aligncenter" width="392"] David Harding of Winton Capital Management[/caption]

David Harding

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 largest silicon producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we're going to go over the latest hedge fund action surrounding NetGear, Inc. (NASDAQ:NTGR).

How are hedge funds trading NetGear, Inc. (NASDAQ:NTGR)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in NTGR over the last 18 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in NetGear, Inc. (NASDAQ:NTGR) was held by GMT Capital, which reported holding $14 million worth of stock at the end of September. It was followed by Alyeska Investment Group with a $4.9 million position. Other investors bullish on the company included Two Sigma Advisors, Winton Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position GMT Capital allocated the biggest weight to NetGear, Inc. (NASDAQ:NTGR), around 0.79% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, setting aside 0.15 percent of its 13F equity portfolio to NTGR.

Since NetGear, Inc. (NASDAQ:NTGR) has witnessed falling interest from the aggregate hedge fund industry, it's easy to see that there were a few funds who were dropping their full holdings last quarter. It's worth mentioning that Minhua Zhang's Weld Capital Management dropped the biggest stake of the "upper crust" of funds tracked by Insider Monkey, comprising about $1.8 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund said goodbye to about $0.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to NetGear, Inc. (NASDAQ:NTGR). We will take a look at Kadmon Holdings, Inc. (NYSE:KDMN), Systemax Inc. (NYSE:SYX), Central Securities Corporation (NYSE:CET), and Hyster-Yale Materials Handling Inc (NYSE:HY). All of these stocks' market caps are closest to NTGR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KDMN,28,307150,3 SYX,11,14658,-2 CET,2,11637,1 HY,10,27150,1 Average,12.75,90149,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $90 million. That figure was $32 million in NTGR's case. Kadmon Holdings, Inc. (NYSE:KDMN) is the most popular stock in this table. On the other hand Central Securities Corporation (NYSE:CET) is the least popular one with only 2 bullish hedge fund positions. NetGear, Inc. (NASDAQ:NTGR) 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. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately NTGR wasn't nearly as popular as these 10 stocks and hedge funds that were betting on NTGR were disappointed as the stock returned 8.4% 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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