We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Extreme Networks, Inc (NASDAQ:EXTR).
Is Extreme Networks, Inc (NASDAQ:EXTR) ready to rally soon? Investors who are in the know are getting less bullish. The number of bullish hedge fund positions fell by 3 lately. Our calculations also showed that EXTR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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.
Jim Simons of Renaissance Technologies
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 view the recent hedge fund action regarding Extreme Networks, Inc (NASDAQ:EXTR).
What have hedge funds been doing with Extreme Networks, Inc (NASDAQ:EXTR)?
Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -16% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in EXTR over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Extreme Networks, Inc (NASDAQ:EXTR), with a stake worth $31.1 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $30.3 million. Arrowstreet Capital, Millennium Management, and Two Sigma Advisors 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 Springowl Associates allocated the biggest weight to Extreme Networks, Inc (NASDAQ:EXTR), around 1.71% of its 13F portfolio. Lion Point is also relatively very bullish on the stock, designating 0.66 percent of its 13F equity portfolio to EXTR.
Due to the fact that Extreme Networks, Inc (NASDAQ:EXTR) has witnessed falling interest from hedge fund managers, it’s safe to say that there were a few fund managers that slashed their entire stakes heading into Q4. Interestingly, Ken Griffin’s Citadel Investment Group dumped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, valued at about $5.8 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund said goodbye to about $0.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q4.
Let’s now take a look at hedge fund activity in other stocks similar to Extreme Networks, Inc (NASDAQ:EXTR). We will take a look at Social Capital Hedosophia Holdings Corp. (NYSE:IPOA), Aerie Pharmaceuticals Inc (NASDAQ:AERI), ANI Pharmaceuticals Inc (NASDAQ:ANIP), and Twin River Worldwide Holdings Inc. (NYSE:TRWH). This group of stocks’ market valuations are similar to EXTR’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IPOA | 25 | 327427 | 2 |
| AERI | 28 | 324001 | 10 |
| ANIP | 15 | 96846 | 3 |
| TRWH | 14 | 207108 | 0 |
| Average | 20.5 | 238846 | 3.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $239 million. That figure was $120 million in EXTR’s case. Aerie Pharmaceuticals Inc (NASDAQ:AERI) is the most popular stock in this table. On the other hand Twin River Worldwide Holdings Inc. (NYSE:TRWH) is the least popular one with only 14 bullish hedge fund positions. Extreme Networks, Inc (NASDAQ:EXTR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately EXTR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); EXTR investors were disappointed as the stock returned -3.4% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
