Should You Avoid GSI Technology, Inc. (GSIT)?

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. That’s why we pay special attention to hedge fund activity in these stocks.

GSI Technology, Inc. (NASDAQ:GSIT) has experienced a decrease in activity from the world’s largest hedge funds recently. It may not come as a surprise to the investors who are in the know, as the shares of GSI Technology, Inc. (NASDAQ:GSIT) lost 22.07% value during the third quarter. We will find out more about the hedge funds that were maintaining stakes in the company  at the end of the last 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 Symmetry Surgical Inc (NASDAQ:SSRG), Aurinia Pharmaceuticals Inc (NASDAQ:AUPH), and Diana Containerships Inc (NASDAQ:DCIX) to gather more data points.

To most market participants, hedge funds are viewed as slow, outdated financial tools of the past. While there are greater than 8000 funds with their doors open at the moment, Our experts look at the aristocrats of this club, approximately 700 funds. Most estimates calculate that this group of people controls most of the hedge fund industry’s total asset base, and by following their highest performing investments, Insider Monkey has discovered various investment strategies that have historically defeated the broader indices. Insider Monkey’s small-cap hedge fund strategy outperformed the S&P 500 index by 12 percentage points annually for a decade in their back tests.

Keeping this in mind, let’s take a look at the recent action encompassing GSI Technology, Inc. (NASDAQ:GSIT).

How have hedgies been trading GSI Technology, Inc. (NASDAQ:GSIT)?

Heading into Q4, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a decrease of 17% from the second quarter. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Israel Englander’s Millennium Management has the largest position in GSI Technology, Inc. (NASDAQ:GSIT), worth close to $3.3 million, comprising less than 0.1% of its total 13F portfolio. The second most bullish fund manager is Soros Fund Management, holding a $2.3 million position; less than 0.1% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism encompass Renaissance Technologies, Chuck Royce’s Royce & Associates, and Kelly Cardwell’s Central Square Management.

We view hedge fund selling in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Two Sigma Advisors. 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 here because none of the 700+ hedge funds tracked by Insider Monkey identified GSI Technology, Inc. (NASDAQ:GSIT) as a viable investment and initiated a position in the stock.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as GSI Technology, Inc. (NASDAQ:GSIT) but similarly valued. These stocks are Symmetry Surgical Inc (NASDAQ:SSRG), Aurinia Pharmaceuticals Inc (NASDAQ:AUPH), Diana Containerships Inc (NASDAQ:DCIX), and Comstock Resources Inc (NYSE:CRK). This group of stocks’ market valuations are similar to GSI Technology, Inc. (NASDAQ:GSIT)’s market valuation.

As you can see, these stocks had an average of 6 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $9 million in GSI Technology, Inc. (NASDAQ:GSIT)’s case. Symmetry Surgical Inc (NASDAQ:SSRG) is the most popular stock in this table. On the other hand, Aurinia Pharmaceuticals Inc (NASDAQ:AUPH) is the least popular one with only 4 bullish hedge fund positions. GSI Technology, Inc. (NASDAQ:GSIT) is not the least popular stock in this group, but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard, Symmetry Surgical Inc (NASDAQ:SSRG) might be a better candidate to consider a long position.