Neogen Corporation (NEOG): Hedge Funds In Wait-and-See Mode

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves.

Hedge fund interest in Neogen Corporation (NASDAQ:NEOG) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare NEOG to other stocks including Sunstone Hotel Investors Inc (NYSE:SHO), South Jersey Industries Inc (NYSE:SJI), and Watts Water Technologies Inc (NYSE:WTS) to get a better sense of its popularity. Our calculations also showed that NEOG isn’t among the 30 most popular stocks among hedge funds (see the video below).

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 market by 40 percentage points since May 2014 through May 30, 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to go over the recent hedge fund action encompassing Neogen Corporation (NASDAQ:NEOG).

What does smart money think about Neogen Corporation (NASDAQ:NEOG)?

Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NEOG over the last 16 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, SG Capital Management held the most valuable stake in Neogen Corporation (NASDAQ:NEOG), which was worth $11.5 million at the end of the second quarter. On the second spot was D E Shaw which amassed $10.8 million worth of shares. Moreover, Marshall Wace LLP, GLG Partners, and Citadel Investment Group were also bullish on Neogen Corporation (NASDAQ:NEOG), 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: Element 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was SG Capital Management).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Neogen Corporation (NASDAQ:NEOG) but similarly valued. These stocks are Sunstone Hotel Investors Inc (NYSE:SHO), South Jersey Industries Inc (NYSE:SJI), Watts Water Technologies Inc (NYSE:WTS), and ASGN Incorporated (NYSE:ASGN). This group of stocks’ market caps resemble NEOG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $209 million. That figure was $29 million in NEOG’s case. Sunstone Hotel Investors Inc (NYSE:SHO) is the most popular stock in this table. On the other hand South Jersey Industries Inc (NYSE:SJI) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Neogen Corporation (NASDAQ:NEOG) is even less popular than SJI. Hedge funds clearly dropped the ball on NEOG as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on NEOG as the stock returned 9.7% during the third quarter and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.