There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Carl Icahn and George Soros think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don’t cover. Because of Carl Icahn and other elite funds’ exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze Zhone Technologies Inc (NASDAQ:ZHNE).
Hedge fund interest in Zhone Technologies Inc (NASDAQ:ZHNE) shares was flat at the end of last quarter. This is usually a negative indicator, coupled with the fact that the shares of Zhone Technologies Inc (NASDAQ:ZHNE) were down 38.84% during the third quarter. In order to understand the hedge fund sentiment better, we will cover hedge funds that held positions 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 Fuel Tech Inc. (NASDAQ:FTEK), Stanley Furniture Co. (NASDAQ:STLY), and StemCells Inc (NASDAQ:STEM) to gather more data points.
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If you’d ask most shareholders, hedge funds are viewed as underperforming, old investment tools of yesteryear. While there are greater than 8000 funds trading at present, we look at the crème de la crème of this group, about 700 funds. Most estimates calculate that this group of people watch over most of the hedge fund industry’s total capital, and by keeping track of their best picks, Insider Monkey has come up with a few investment strategies that have historically surpassed the market. Insider Monkey’s small-cap hedge fund strategy defeated the S&P 500 index by 12 percentage points annually for a decade in their back tests.
With all of this in mind, let’s take a peek at the key action encompassing Zhone Technologies Inc (NASDAQ:ZHNE).
What have hedge funds been doing with Zhone Technologies Inc (NASDAQ:ZHNE)?
At the end of Q3, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, unchanged from one quarter earlier. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors has the number one position in Zhone Technologies Inc (NASDAQ:ZHNE), worth close to $0.4 million, corresponding to 0.2% of its total 13F portfolio. The second largest stake is held by Chao Ku of Nine Chapters Capital Management, with a $67,000 position; the fund has less than 0.1% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism encompass Cliff Asness’ AQR Capital Management, and Ken Griffin’s Citadel Investment Group.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: PEAK6 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 here because only one of the 700+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Algert Coldiron Investors).
Let’s go over hedge fund activity in other stocks similar to Zhone Technologies Inc (NASDAQ:ZHNE). These stocks are Fuel Tech Inc. (NASDAQ:FTEK), Stanley Furniture Co. (NASDAQ:STLY), StemCells Inc (NASDAQ:STEM), and Erickson Inc (NASDAQ:EAC). All of these stocks’ market caps are similar to Zhone Technologies Inc (NASDAQ:ZHNE)’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FTEK | 4 | 1782 | 0 |
| STLY | 4 | 12112 | 0 |
| STEM | 5 | 1104 | 1 |
| EAC | 5 | 10007 | 1 |
As you can see, these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $0.47 million in Zhone Technologies Inc (NASDAQ:ZHNE)’s case. StemCells Inc (NASDAQ:STEM) is the most popular stock in this table. On the other hand, Fuel Tech Inc. (NASDAQ:FTEK) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Zhone Technologies Inc (NASDAQ:ZHNE) is even less popular than Fuel Tech Inc. (NASDAQ:FTEK). Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case, more research is warranted.