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Were Hedge Funds Wrong About Crowding Into Acacia Communications, Inc. (ACIA)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Acacia Communications, Inc. (NASDAQ:ACIA)? The smart money sentiment can provide an answer to this question.

Acacia Communications, Inc. (NASDAQ:ACIA) was in 34 hedge funds' portfolios at the end of June. The all time high for this statistics is 31. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. ACIA has experienced an increase in support from the world's most elite money managers recently. There were 22 hedge funds in our database with ACIA holdings at the end of March. Our calculations also showed that ACIA 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.

According to most market participants, hedge funds are seen as worthless, old financial tools of the past. While there are greater than 8000 funds trading at present, We choose to focus on the masters of this group, approximately 850 funds. These investment experts handle bulk of the smart money's total capital, and by keeping track of their first-class stock picks, Insider Monkey has formulated a number of investment strategies that have historically defeated the S&P 500 index. Insider Monkey's flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Matthew Halbower Pentwater Capital
Matthew Halbower Pentwater Capital

Matthew Halbower of Pentwater Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. 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. Now let's check out the key hedge fund action surrounding Acacia Communications, Inc. (NASDAQ:ACIA).

What have hedge funds been doing with Acacia Communications, Inc. (NASDAQ:ACIA)?

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 55% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in ACIA over the last 20 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Alpine Associates held the most valuable stake in Acacia Communications, Inc. (NASDAQ:ACIA), which was worth $147.8 million at the end of the third quarter. On the second spot was Magnetar Capital which amassed $115.7 million worth of shares. Renaissance Technologies, Citadel Investment Group, and Pentwater Capital 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 Melqart Asset Management allocated the biggest weight to Acacia Communications, Inc. (NASDAQ:ACIA), around 9.08% of its 13F portfolio. Alpine Associates is also relatively very bullish on the stock, dishing out 8.51 percent of its 13F equity portfolio to ACIA.

As industrywide interest jumped, key money managers were breaking ground themselves. Melqart Asset Management, managed by Michel Massoud, created the biggest position in Acacia Communications, Inc. (NASDAQ:ACIA). Melqart Asset Management had $73.3 million invested in the company at the end of the quarter. Simon Sadler's Segantii Capital also initiated a $21.3 million position during the quarter. The other funds with new positions in the stock are Dmitry Balyasny's Balyasny Asset Management, Louis Bacon's Moore Global Investments, and David Simon's Twin Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Acacia Communications, Inc. (NASDAQ:ACIA) but similarly valued. These stocks are Cimarex Energy Co (NYSE:XEC), Navistar International Corp (NYSE:NAV), STAAR Surgical Company (NASDAQ:STAA), Goosehead Insurance, Inc. (NASDAQ:GSHD), FirstCash, Inc. (NASDAQ:FCFS), Varonis Systems Inc (NASDAQ:VRNS), and Insmed Incorporated (NASDAQ:INSM). This group of stocks' market caps resemble ACIA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XEC,39,556800,4 NAV,33,1245849,-3 STAA,20,920886,-1 GSHD,15,114944,4 FCFS,22,144073,6 VRNS,28,604539,8 INSM,30,613700,10 Average,26.7,600113,4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $600 million. That figure was $960 million in ACIA's case. Cimarex Energy Co (NYSE:XEC) is the most popular stock in this table. On the other hand Goosehead Insurance, Inc. (NASDAQ:GSHD) is the least popular one with only 15 bullish hedge fund positions. Acacia Communications, Inc. (NASDAQ:ACIA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ACIA is 79.6. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately ACIA wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ACIA were disappointed as the stock returned 0.8% since the end of June (through 10/30) 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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