Is Applied Optoelectronics Inc (AAOI) a Good Stock to Invest in?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

In this article, we are going to focus on Applied Optoelectronics Inc (NASDAQ:AAOI), which registered an increase in popularity last quarter. Among the funds tracked by Insider Monkey, 16 funds reported long positions in Applied Optoelectronics as of the end of September, up by five funds over the quarter. However, the level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Arbutus Biopharma Corp (NASDAQ:ABUS), Control4 Corp (NASDAQ:CTRL), and Enzymotec Ltd (NASDAQ:ENZY) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Keeping this in mind, let’s go over the new action surrounding Applied Optoelectronics Inc (NASDAQ:AAOI).

What have hedge funds been doing with Applied Optoelectronics Inc (NASDAQ:AAOI)?

At the end of the third quarter, a total of 16 of the hedge funds tracked by Insider Monkey were long Applied Optoelectronics Inc (NASDAQ:AAOI), a change of 45% from the end of the previous quarter. Below, you can check out the change in hedge fund sentiment towards AAOI over the last five quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Remy Trafelet’s Trafelet Capital has the most valuable position in Applied Optoelectronics Inc (NASDAQ:AAOI), worth close to $22.8 million, amounting to 17.3% of its total 13F portfolio. The second most bullish fund manager is Alex Sacerdote’s Whale Rock Capital Management, with a $14.6 million position; 0.9% of its 13F portfolio is allocated to the company. Some other professional money managers with similar optimism encompass Chuck Royce’s Royce & Associates and Bernard Selz’s Selz Capital. We should note that Whale Rock Capital Management is among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Consequently, key money managers have jumped into Applied Optoelectronics Inc (NASDAQ:AAOI) headfirst. Whale Rock Capital Management established the largest position in Applied Optoelectronics Inc (NASDAQ:AAOI). Brandon Osten’s Venator Capital Management also made a $3.2 million investment in the stock during the quarter. The following funds were also among the new AAOI investors: D. E. Shaw’s D E Shaw, Israel Englander’s Millennium Management, and Richard Driehaus’s Driehaus Capital.

Let’s check out hedge fund activity in other stocks similar to Applied Optoelectronics Inc (NASDAQ:AAOI). We will take a look at Arbutus Biopharma Corp (NASDAQ:ABUS), Control4 Corp (NASDAQ:CTRL), Enzymotec Ltd (NASDAQ:ENZY), and Gaiam, Inc. (NASDAQ:GAIA). All of these stocks’ market caps resemble AAOI’s market cap.

As you can see these stocks had an average of eight funds with bullish positions and the average amount invested in these stocks was $45 million. That figure was $75 million in AAOI’s case. Control4 Corp (NASDAQ:CTRL) is the most popular stock in this table, while Gaiam, Inc. (NASDAQ:GAIA) is the least popular one with only four investors holding long positions. Compared to these stocks Applied Optoelectronics Inc (NASDAQ:AAOI) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.