The elite funds run by legendary investors such as David Tepper and Dan Loeb make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentives to do the research necessary to beat the market. That’s why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at AU Optronics Corp. (NYSE:AUO) from the perspective of those elite funds.
AU Optronics Corp. (NYSE:AUO) investors should pay attention to a decrease in hedge fund sentiment in recent months. Our calculations also showed that AUO isn’t among the 30 most popular stocks among hedge funds.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 market by 32 percentage points since May 2014 through March 12, 2019 (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.
We’re going to take a peek at the recent hedge fund action encompassing AU Optronics Corp. (NYSE:AUO).
How have hedgies been trading AU Optronics Corp. (NYSE:AUO)?
Heading into the first quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. By comparison, 9 hedge funds held shares or bullish call options in AUO a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in AU Optronics Corp. (NYSE:AUO), which was worth $50.8 million at the end of the third quarter. On the second spot was Sensato Capital Management which amassed $2.3 million worth of shares. Moreover, Arrowstreet Capital, Two Sigma Advisors, and D E Shaw were also bullish on AU Optronics Corp. (NYSE:AUO), allocating a large percentage of their portfolios to this stock.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: PEAK6 Capital Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ hedge funds tracked by Insider Monkey identified AUO as a viable investment and initiated a position in the stock.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as AU Optronics Corp. (NYSE:AUO) but similarly valued. We will take a look at MGIC Investment Corporation (NYSE:MTG), Southwest Gas Holdings, Inc. (NYSE:SWX), Americold Realty Trust (NYSE:COLD), and BWX Technologies Inc (NYSE:BWXT). This group of stocks’ market caps match AUO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MTG | 35 | 358474 | 5 |
| SWX | 17 | 225927 | 4 |
| COLD | 16 | 628764 | -5 |
| BWXT | 19 | 85950 | 2 |
| Average | 21.75 | 324779 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $325 million. That figure was $58 million in AUO’s case. MGIC Investment Corporation (NYSE:MTG) is the most popular stock in this table. On the other hand Americold Realty Trust (NYSE:COLD) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks AU Optronics Corp. (NYSE:AUO) is even less popular than COLD. Hedge funds dodged a bullet by taking a bearish stance towards AUO. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately AUO wasn’t nearly as popular as these 15 stock (hedge fund sentiment was very bearish); AUO investors were disappointed as the stock returned -6.1% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.
