Were Hedge Funds Right About Lumentum Holdings Inc (LITE)?

In this article we will check out the progression of hedge fund sentiment towards Lumentum Holdings Inc (NASDAQ:LITE) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Lumentum Holdings Inc (NASDAQ:LITE) a buy here? The best stock pickers were buying. The number of bullish hedge fund positions inched up by 8 lately. Lumentum Holdings Inc (NASDAQ:LITE) was in 42 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 37. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LITE 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). There were 34 hedge funds in our database with LITE holdings at the end of March.

Video: 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 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 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 stocks that are in our short portfolio.

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth stocks to buy. 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. Now we’re going to take a peek at the key hedge fund action surrounding Lumentum Holdings Inc (NASDAQ:LITE).

Hedge fund activity in Lumentum Holdings Inc (NASDAQ:LITE)

Heading into the third quarter of 2020, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in LITE over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in Lumentum Holdings Inc (NASDAQ:LITE), which was worth $127.5 million at the end of the third quarter. On the second spot was Holocene Advisors which amassed $94.9 million worth of shares. Fisher Asset Management, Millennium Management, and Balyasny Asset Management 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 Boardman Bay Capital Management allocated the biggest weight to Lumentum Holdings Inc (NASDAQ:LITE), around 7% of its 13F portfolio. Divisar Capital is also relatively very bullish on the stock, earmarking 4.51 percent of its 13F equity portfolio to LITE.

Consequently, some big names were leading the bulls’ herd. Alyeska Investment Group, managed by Anand Parekh, assembled the biggest position in Lumentum Holdings Inc (NASDAQ:LITE). Alyeska Investment Group had $28.7 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners also made a $14.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Philip Hempleman’s Ardsley Partners, Michael Gelband’s ExodusPoint Capital, and Michael Rockefeller and KarláKroeker’s Woodline Partners.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Lumentum Holdings Inc (NASDAQ:LITE) but similarly valued. These stocks are Smartsheet Inc. (NYSE:SMAR), SYNNEX Corporation (NYSE:SNX), OGE Energy Corp. (NYSE:OGE), Syneos Health, Inc. (NASDAQ:SYNH), Athene Holding Ltd. (NYSE:ATH), Elbit Systems Ltd. (NASDAQ:ESLT), and Robert Half International Inc. (NYSE:RHI). This group of stocks’ market values match LITE’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.1 hedge funds with bullish positions and the average amount invested in these stocks was $591 million. That figure was $678 million in LITE’s case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand Elbit Systems Ltd. (NASDAQ:ESLT) is the least popular one with only 4 bullish hedge fund positions. Lumentum Holdings Inc (NASDAQ:LITE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LITE is 84.2. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately LITE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LITE were disappointed as the stock returned 3.2% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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