Was The Smart Money Right About New Relic Inc (NEWR)?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding New Relic Inc (NYSE:NEWR).

New Relic Inc (NYSE:NEWR) has seen an increase in enthusiasm from smart money of late. New Relic Inc (NYSE:NEWR) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. There were 31 hedge funds in our database with NEWR positions at the end of the first quarter. Our calculations also showed that NEWR isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ricky Sandler of Eminence Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest insurance companies to identify fast growing companies in various industries. 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 website to get excerpts of these letters in your inbox. With all of this in mind we’re going to review the recent hedge fund action regarding New Relic Inc (NYSE:NEWR).

How are hedge funds trading New Relic Inc (NYSE:NEWR)?

At Q2’s end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the first quarter of 2020. By comparison, 29 hedge funds held shares or bullish call options in NEWR a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Eminence Capital was the largest shareholder of New Relic Inc (NYSE:NEWR), with a stake worth $319.9 million reported as of the end of June. Trailing Eminence Capital was Matrix Capital Management, which amassed a stake valued at $233.2 million. HMI Capital, Tiger Global Management LLC, and Two Sigma Advisors 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 HMI Capital allocated the biggest weight to New Relic Inc (NYSE:NEWR), around 10.65% of its 13F portfolio. Toronado Partners is also relatively very bullish on the stock, designating 10.42 percent of its 13F equity portfolio to NEWR.

With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the largest position in New Relic Inc (NYSE:NEWR). Arrowstreet Capital had $16.4 million invested in the company at the end of the quarter. Guy Shahar’s DSAM Partners also initiated a $11.6 million position during the quarter. The other funds with brand new NEWR positions are Steve Cohen’s Point72 Asset Management, Michel Massoud’s Melqart Asset Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as New Relic Inc (NYSE:NEWR) but similarly valued. These stocks are Nektar Therapeutics (NASDAQ:NKTR), First Citizens BancShares Inc. (NASDAQ:FCNCA), Wingstop Inc (NASDAQ:WING), Neogen Corporation (NASDAQ:NEOG), First Financial Bankshares Inc (NASDAQ:FFIN), TriNet Group Inc (NYSE:TNET), and SelectQuote, Inc. (NYSE:SLQT). This group of stocks’ market valuations are similar to NEWR’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.1 hedge funds with bullish positions and the average amount invested in these stocks was $197 million. That figure was $1207 million in NEWR’s case. SelectQuote, Inc. (NYSE:SLQT) is the most popular stock in this table. On the other hand First Citizens BancShares Inc. (NASDAQ:FCNCA) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks New Relic Inc (NYSE:NEWR) is more popular among hedge funds. Our overall hedge fund sentiment score for NEWR is 82.9. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Unfortunately NEWR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NEWR were disappointed as the stock returned -12% since the end of the second quarter (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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