We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Nelnet, Inc. (NYSE:NNI).
Nelnet, Inc. (NYSE:NNI) investors should be aware of a decrease in hedge fund sentiment recently. NNI was in 11 hedge funds’ portfolios at the end of the third quarter of 2019. There were 13 hedge funds in our database with NNI positions at the end of the previous quarter. Our calculations also showed that NNI 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.
Cliff Asness of AQR Capital Management
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. Let’s analyze the key hedge fund action surrounding Nelnet, Inc. (NYSE:NNI).
How have hedgies been trading Nelnet, Inc. (NYSE:NNI)?
At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NNI 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.
According to Insider Monkey’s hedge fund database, Magnolia Capital Fund, managed by Adam Peterson, holds the largest position in Nelnet, Inc. (NYSE:NNI). Magnolia Capital Fund has a $65.3 million position in the stock, comprising 7.3% of its 13F portfolio. The second largest stake is held by Renaissance Technologies holding a $4.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Cliff Asness’s AQR Capital Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Magnolia Capital Fund allocated the biggest weight to Nelnet, Inc. (NYSE:NNI), around 7.31% of its 13F portfolio. Prescott Group Capital Management is also relatively very bullish on the stock, setting aside 0.49 percent of its 13F equity portfolio to NNI.
Judging by the fact that Nelnet, Inc. (NYSE:NNI) has faced a decline in interest from the smart money, it’s safe to say that there lies a certain “tier” of fund managers that slashed their positions entirely last quarter. It’s worth mentioning that Thomas G. Maheras’s Tegean Capital Management said goodbye to the largest stake of the “upper crust” of funds monitored by Insider Monkey, worth about $4.4 million in stock. Brian Gaines’s fund, Springhouse Capital Management, also sold off its stock, about $1.8 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds last quarter.
Let’s now review hedge fund activity in other stocks similar to Nelnet, Inc. (NYSE:NNI). These stocks are WD-40 Company (NASDAQ:WDFC), Trinity Industries, Inc. (NYSE:TRN), BridgeBio Pharma, Inc. (NASDAQ:BBIO), and PolyOne Corporation (NYSE:POL). This group of stocks’ market valuations are similar to NNI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| WDFC | 17 | 209160 | 2 |
| TRN | 26 | 680181 | 3 |
| BBIO | 12 | 884584 | -2 |
| POL | 19 | 176335 | -5 |
| Average | 18.5 | 487565 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $488 million. That figure was $86 million in NNI’s case. Trinity Industries, Inc. (NYSE:TRN) is the most popular stock in this table. On the other hand BridgeBio Pharma, Inc. (NASDAQ:BBIO) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Nelnet, Inc. (NYSE:NNI) is even less popular than BBIO. Hedge funds dodged a bullet by taking a bearish stance towards NNI. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately NNI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); NNI investors were disappointed as the stock returned -0.6% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
