Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in nLIGHT, Inc. (NASDAQ:LASR)? The smart money sentiment can provide an answer to this question.
nLIGHT, Inc. (NASDAQ:LASR) investors should be aware of a decrease in hedge fund sentiment recently. nLIGHT, Inc. (NASDAQ:LASR) was in 18 hedge funds’ portfolios at the end of March. The all time high for this statistic is 20. Our calculations also showed that LASR isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).
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 S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
Donald Sussman of Paloma Partners
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind let’s take a look at the recent hedge fund action surrounding nLIGHT, Inc. (NASDAQ:LASR).
Do Hedge Funds Think LASR Is A Good Stock To Buy Now?
At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the fourth quarter of 2020. The graph below displays the number of hedge funds with bullish position in LASR over the last 23 quarters. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of nLIGHT, Inc. (NASDAQ:LASR), with a stake worth $28.1 million reported as of the end of March. Trailing Royce & Associates was Driehaus Capital, which amassed a stake valued at $19.5 million. Citadel Investment Group, Motley Fool Asset Management, and D E Shaw 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 Motley Fool Asset Management allocated the biggest weight to nLIGHT, Inc. (NASDAQ:LASR), around 0.41% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, setting aside 0.29 percent of its 13F equity portfolio to LASR.
Because nLIGHT, Inc. (NASDAQ:LASR) has experienced falling interest from the smart money, it’s easy to see that there is a sect of hedge funds that elected to cut their entire stakes in the first quarter. Intriguingly, Principal Global Investors’s Columbus Circle Investors dropped the biggest position of all the hedgies tracked by Insider Monkey, totaling close to $1.4 million in stock. Peter Algert’s fund, Algert Global, also said goodbye to its stock, about $1.4 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 2 funds in the first quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as nLIGHT, Inc. (NASDAQ:LASR) but similarly valued. These stocks are Fresh Del Monte Produce Inc (NYSE:FDP), Nexa Resources S.A. (NYSE:NEXA), StepStone Group Inc. (NASDAQ:STEP), Harsco Corporation (NYSE:HSC), Kinnate Biopharma Inc. (NASDAQ:KNTE), Materion Corp (NYSE:MTRN), and Score Media and Gaming Inc. (NASDAQ:SCR). This group of stocks’ market valuations resemble LASR’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FDP | 4 | 18305 | -1 |
| NEXA | 5 | 6665 | 2 |
| STEP | 13 | 69812 | 5 |
| HSC | 10 | 15844 | -2 |
| KNTE | 16 | 428288 | -2 |
| MTRN | 17 | 108590 | 5 |
| SCR | 12 | 44339 | 12 |
| Average | 11 | 98835 | 2.7 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $99 million. That figure was $82 million in LASR’s case. Materion Corp (NYSE:MTRN) is the most popular stock in this table. On the other hand Fresh Del Monte Produce Inc (NYSE:FDP) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks nLIGHT, Inc. (NASDAQ:LASR) is more popular among hedge funds. Our overall hedge fund sentiment score for LASR is 80. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and still beat the market by 10.1 percentage points. Unfortunately LASR wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on LASR were disappointed as the stock returned 1.3% since the end of the first quarter (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.
