Momo Inc (ADR) (NASDAQ:MOMO) surged by as high as 10% to $17.25 per share in intraday trading today, June 23, on news that the social networking company has received a buyout offer from a group which includes its co-founder, Tang Yan. Yan and his group, which already own 47.8% of the company, have offered $18.90 for each outstanding share of the company, a 20.5% premium over the stock’s closing price of $15.69 on Monday. Since the start of the year until Monday, the stock of the China-based company has gained 32.18%.
According to Momo Inc (ADR) (NASDAQ:MOMO), the group which has forwarded an offer to acquire the rest of the company includes Matrix Partners China II Hong Kong Ltd., Sequoia Capital China Investment Management L.P. and Huatai Ruilian Fund Management Co. Momo now has a special committee to study the merits of the offer.
It’s expected that shares of companies like Momo Inc (ADR) (NASDAQ:MOMO) which receive a tender offer surge on the news. However, it’s noteworthy to point out that smart money has seen the potential of the company even before this surge. Investors who are in the know are becoming hopeful. The number of long hedge fund bets went up by five during the first quarter.
General opinion is that hedge funds underperform the S&P 500 based on net returns. But we are missing something very important here. Hedge funds generally pull in strong returns from their top small-cap stocks and invest a lot of their resources into analyzing these stocks, they simply don’t take large enough positions in them relative to their portfolios to generate strong overall returns because their large-cap picks underperform the market. We share the top 15 small-cap stocks favored by the best hedge fund managers every quarter and this strategy has managed to outperform the S&P 500 every year since it was launched in August 2012, returning over 142% and beating the market by more than 82 percentage points (read the details). So we know that collective hedge fund sentiment is extremely telling and valuable.
Tracking the activity of insiders and hedge funds in a stock is a powerful tool that can provide valuable insight to investors. While some investors scoff at the notion of monitoring hedge fund activity, believing their poor returns in recent years to be a reflection of poor stock picking ability, that is not actually the case. Hedge funds have underperformed the market for several reasons which don’t actually have anything to do with stock picking, but rather with the composition of their investments. Insider activity, meanwhile, is just as important, as research studies have proven the efficacy of piggybacking insider purchases.
Keeping this in mind, let’s go over the key action regarding Momo Inc (ADR) (NASDAQ:MOMO).
What do hedge funds think about Momo Inc (ADR) (NASDAQ:MOMO)?
At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on the company, a change of 100% from the fourth quarter. By the end of the fourth quarter of 2014, the funds we track owned $45.09 million in Momo stock. However, this value significantly increased to $114.94 million by the end of the first quarter of 2015. Considering that shares of Momo Inc plunged by 9.58% during the first quarter of the year, the increase of ownership signals a bullish sentiment from hedge funds.
Of the funds tracked by Insider Monkey, Hillhouse Capital Management, managed by Lei Zhang, holds the largest position in Momo Inc (ADR) (NASDAQ:MOMO), which contains 5.46 million shares, valued at $57.9 million, comprising 1.1% of its 13F portfolio. Coming in second is Chase Coleman’s Tiger Global Management, which owns 2.18 million shares, worth $23.1 million. Other hedge funds with similar optimism include Karthik Sarma’s SRS Investment Management, Ken Griffin’s Citadel Investment Group and Philippe Laffont’s Coatue Management.
With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. Josh Resnick‘s Jericho Capital Asset Management initiated a $3.3 million position during the quarter. The other funds with new positions in the stock are Israel Englander’s Millennium Management, Joseph A. Jolson’s Harvest Capital Strategies, and David Costen Haley’s HBK Investments.
With the tender offer for Momo Inc (ADR) (NASDAQ:MOMO) and the bullish sentiment of hedge funds, we recommend being long on this stock.
Disclosure: None
