The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May and August as this time China pivoted and Trump put more pressure on China by increasing tariffs. Fourth quarter brought optimism to the markets and hedge funds’ top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 37.4% through the end of November, vs. a gain of 27.5% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Neos Therapeutics Inc (NASDAQ:NEOS), and what that likely means for the prospects of the company and its stock.
Hedge fund interest in Neos Therapeutics Inc (NASDAQ:NEOS) 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 NEOS to other stocks including Almaden Minerals Ltd. (NYSE:AAU), Ark Restaurants Corp. (NASDAQ:ARKR), and Caledonia Mining Corporation Plc (NYSE:CMCL) to get a better sense of its popularity.
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
James E. Flynn of Deerfield Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to analyze the recent hedge fund action surrounding Neos Therapeutics Inc (NASDAQ:NEOS).
How have hedgies been trading Neos Therapeutics Inc (NASDAQ:NEOS)?
At Q3’s end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 8 hedge funds held shares or bullish call options in NEOS a year ago. With hedge funds’ sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in Neos Therapeutics Inc (NASDAQ:NEOS) was held by Nantahala Capital Management, which reported holding $6.8 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $0.6 million position. Other investors bullish on the company included Deerfield Management, Proxima Capital Management, and Paloma Partners. In terms of the portfolio weights assigned to each position Proxima Capital Management allocated the biggest weight to Neos Therapeutics Inc (NASDAQ:NEOS), around 0.47% of its 13F portfolio. Nantahala Capital Management is also relatively very bullish on the stock, dishing out 0.25 percent of its 13F equity portfolio to NEOS.
Due to the fact that Neos Therapeutics Inc (NASDAQ:NEOS) has witnessed a decline in interest from the aggregate hedge fund industry, it’s easy to see that there were a few money managers who were dropping their positions entirely in the third quarter. At the top of the heap, Andrew Weiss’s Weiss Asset Management dropped the largest stake of all the hedgies monitored by Insider Monkey, worth close to $0 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund dumped about $0 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks similar to Neos Therapeutics Inc (NASDAQ:NEOS). These stocks are Almaden Minerals Ltd. (NYSE:AAU), Ark Restaurants Corp. (NASDAQ:ARKR), Caledonia Mining Corporation Plc (NYSE:CMCL), and Hebron Technology Co., Ltd. (NASDAQ:HEBT). This group of stocks’ market valuations resemble NEOS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AAU | 1 | 1335 | -1 |
| ARKR | 1 | 1843 | 0 |
| CMCL | 1 | 98 | 0 |
| HEBT | 1 | 617 | -1 |
| Average | 1 | 973 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 1 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $9 million in NEOS’s case. Almaden Minerals Ltd. (NYSE:AAU) is the most popular stock in this table. On the other hand Almaden Minerals Ltd. (NYSE:AAU) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Neos Therapeutics Inc (NASDAQ:NEOS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on NEOS as the stock returned 12.2% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
