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Is Xunlei Ltd (XNET) A Good Stock To Buy?

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Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Xunlei Ltd (NASDAQ:XNET).

Is Xunlei Ltd (NASDAQ:XNET) a good stock to buy now? XNET shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds' portfolios at the end of September. Our calculations also showed that XNET isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare XNET to other stocks including DermTech, Inc. (NASDAQ:DMTK), Larimar Therapeutics, Inc. (NASDAQ:LRMR), and Adicet Bio Inc. (NASDAQ:ACET) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 66 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 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 stocks that are in our short portfolio.

Gavin Saitowitz of Prelude Capital
Gavin Saitowitz of Prelude Capital

Gavin Saitowitz of Prelude Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. With all of this in mind we're going to analyze the latest hedge fund action surrounding Xunlei Ltd (NASDAQ:XNET).

How have hedgies been trading Xunlei Ltd (NASDAQ:XNET)?

At third quarter's end, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 2 hedge funds held shares or bullish call options in XNET 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.

Among these funds, Ovata Capital Management held the most valuable stake in Xunlei Ltd (NASDAQ:XNET), which was worth $2.8 million at the end of the third quarter. On the second spot was Keywise Capital Management which amassed $1.3 million worth of shares. Prelude Capital (previously Springbok Capital), Two Sigma Advisors, and Citadel Investment Group 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 Ovata Capital Management allocated the biggest weight to Xunlei Ltd (NASDAQ:XNET), around 1% of its 13F portfolio. Keywise Capital Management is also relatively very bullish on the stock, designating 0.31 percent of its 13F equity portfolio to XNET.

Because Xunlei Ltd (NASDAQ:XNET) has experienced a decline in interest from hedge fund managers, we can see that there is a sect of money managers who were dropping their entire stakes last quarter. Intriguingly, D. E. Shaw's D E Shaw dumped the largest stake of all the hedgies monitored by Insider Monkey, comprising close to $0.1 million in stock. Donald Sussman's fund, Paloma Partners, also sold off its stock, about $0 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Xunlei Ltd (NASDAQ:XNET) but similarly valued. These stocks are DermTech, Inc. (NASDAQ:DMTK), Larimar Therapeutics, Inc. (NASDAQ:LRMR), Adicet Bio Inc. (NASDAQ:ACET), MediciNova, Inc. (NASDAQ:MNOV), Silicom Ltd. (NASDAQ:SILC), Metropolitan Bank Holding Corp. (NYSE:MCB), and Orion Energy Systems, Inc. (NASDAQ:OESX). This group of stocks' market valuations resemble XNET's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DMTK,6,37635,-1 LRMR,17,167530,-1 ACET,7,89750,7 MNOV,5,2263,1 SILC,5,7269,0 MCB,7,41108,0 OESX,7,25463,1 Average,7.7,53003,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.7 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $5 million in XNET's case. Larimar Therapeutics, Inc. (NASDAQ:LRMR) is the most popular stock in this table. On the other hand MediciNova, Inc. (NASDAQ:MNOV) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Xunlei Ltd (NASDAQ:XNET) is even less popular than MNOV. Our overall hedge fund sentiment score for XNET is 21.7. 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. Hedge funds dodged a bullet by taking a bearish stance towards XNET. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th but managed to beat the market again by 16.1 percentage points. Unfortunately XNET wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); XNET investors were disappointed as the stock returned -13.7% since the end of the third quarter (through 11/27) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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

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