Is Violin Memory Inc (VMEM) Going to Burn These Hedge Funds?

It’s a little-known fact that stock performance is not evenly distributed (i.e. you don’t have a 50/50 chance of picking a market-beating stock). In fact, despite the S&P 500 gaining about 5.2% between November 1, 2014 and October 30, 2015, less than 49% of the stocks in the index beat the market during that time. In contrast, the 30 stocks from the index which were the most popular among the investors that we track returned 9.5% during that time and 63% of them beat the market. This shows that while hedge funds get a lot of flak from the mainstream media for their performance, it can be rewarding to follow their moves using the right sets of data. Even then, there is never a fool proof strategy to generating returns, as even the collective wisdom of top hedge funds gets it wrong sometimes, as in the case of some of their top picks from the index like Micron and Anadarko. The data though, shows that following the collective wisdom of select hedge funds can be a very wise move overall.

Is Violin Memory Inc (NYSE:VMEM) a buy, sell, or hold? The smart money is getting less optimistic. The number of long hedge fund bets shrunk by 4 recently. VMEM was in 7 hedge funds’ portfolios at the end of the third quarter of 2015. There were 11 hedge funds in our database with VMEM holdings at the end of the previous quarter. 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 Collectors Universe, Inc. (NASDAQ:CLCT), Dixie Group Inc (NASDAQ:DXYN), and Unilife Corp (NASDAQ:UNIS) to gather more data points.

According to most investors, hedge funds are perceived as underperforming, outdated financial tools of years past. While there are more than 8000 funds in operation at the moment, We look at the crème de la crème of this club, around 700 funds. These investment experts manage bulk of all hedge funds’ total capital, and by observing their finest investments, Insider Monkey has uncovered a few investment strategies that have historically exceeded Mr. Market. Insider Monkey’s small-cap hedge fund strategy defeated the S&P 500 index by 12 percentage points annually for a decade in their back tests.

Now, let’s review the key action surrounding Violin Memory Inc (NYSE:VMEM).

Hedge fund activity in Violin Memory Inc (NYSE:VMEM)

At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a slump of 36% from the second quarter. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Harvest Capital Strategies, managed by Joseph A. Jolson, holds the most valuable position in Violin Memory Inc (NYSE:VMEM). The fund estimated the position to be worth $6.2 million at the end of the quarter, comprising 1.1% of its 13F portfolio. The second most bullish fund manager is Clinton Group, managed by George Hall, which holds a $1.4 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining members of the smart money that are bullish comprise George Soros’s Soros Fund Management, Israel Englander’s Millennium Management and Ryan Heslop and Ariel Warszawski’s Firefly Value Partners.

Since Violin Memory Inc (NYSE:VMEM) has witnessed a declination in interest from the aggregate hedge fund industry, logic holds that there is a sect of fund managers that slashed their entire stakes by the end of the third quarter. Interestingly, David Lamond’s Lamond Capital Partners dumped the largest stake of the 700 funds tracked by Insider Monkey, totaling an estimated $9.6 million in stock, and Frank Brosens’s Taconic Capital was right behind this move, as the fund dumped about $2.7 million worth of shares. These moves are interesting, as aggregate hedge fund interest dropped by 4 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to Violin Memory Inc (NYSE:VMEM). We will take a look at Collectors Universe, Inc. (NASDAQ:CLCT), Dixie Group Inc (NASDAQ:DXYN), Unilife Corp (NASDAQ:UNIS), and Accuride Corporation (NYSE:ACW). This group of stocks’ market valuations are similar to VMEM’s market valuation.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $9 million in VMEM’s case, not a positive sign. Accuride Corporation (NYSE:ACW) is the most popular stock in this table, while Unilife Corp (NASDAQ:UNIS) is the laggard with only 4 bullish hedge fund positions. Violin Memory Inc (NYSE:VMEM) is not the most popular stock in this group, but hedge fund interest is still above average. Despite the fact that this is a slightly positive signal, we’d rather spend our time researching stocks that hedge funds are piling on. In this regard ACW might be a better candidate to consider a long position.