Were Hedge Funds Right About Nova Measuring Instruments Ltd. (NVMI)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Nova Measuring Instruments Ltd. (NASDAQ:NVMI).

Nova Measuring Instruments Ltd. (NASDAQ:NVMI) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 16 hedge funds’ portfolios at the end of the first quarter of 2021. Our calculations also showed that NVMI isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). 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 Manchester United PLC (NYSE:MANU), Skyline Champion Corporation (NYSE:SKY), and Vericel Corp (NASDAQ:VCEL) to gather more data points.

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. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. 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 115 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.

Noam Gottesman of GLG 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. Keeping this in mind let’s take a peek at the new hedge fund action surrounding Nova Measuring Instruments Ltd. (NASDAQ:NVMI).

Do Hedge Funds Think NVMI Is A Good Stock To Buy Now?

At first quarter’s end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NVMI over the last 23 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Adage Capital Management was the largest shareholder of Nova Measuring Instruments Ltd. (NASDAQ:NVMI), with a stake worth $144.1 million reported as of the end of March. Trailing Adage Capital Management was Renaissance Technologies, which amassed a stake valued at $122.5 million. Royce & Associates, Noked Capital, and Montanaro 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 Noked Capital allocated the biggest weight to Nova Measuring Instruments Ltd. (NASDAQ:NVMI), around 3.57% of its 13F portfolio. Montanaro Asset Management is also relatively very bullish on the stock, designating 1.26 percent of its 13F equity portfolio to NVMI.

Because Nova Measuring Instruments Ltd. (NASDAQ:NVMI) has witnessed a decline in interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of hedge funds who were dropping their entire stakes heading into Q2. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the biggest stake of the “upper crust” of funds tracked by Insider Monkey, valued at close to $0.9 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund dropped about $0.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Nova Measuring Instruments Ltd. (NASDAQ:NVMI). These stocks are Manchester United PLC (NYSE:MANU), Skyline Champion Corporation (NYSE:SKY), Vericel Corp (NASDAQ:VCEL), RLJ Lodging Trust (NYSE:RLJ), TransAlta Corporation (NYSE:TAC), Innospec Inc. (NASDAQ:IOSP), and Minerals Technologies Inc (NYSE:MTX). This group of stocks’ market valuations are similar to NVMI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.3 hedge funds with bullish positions and the average amount invested in these stocks was $116 million. That figure was $343 million in NVMI’s case. Skyline Champion Corporation (NYSE:SKY) is the most popular stock in this table. On the other hand Innospec Inc. (NASDAQ:IOSP) is the least popular one with only 9 bullish hedge fund positions. Nova Measuring Instruments Ltd. (NASDAQ:NVMI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NVMI is 60. 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 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 beat the market again by 10.1 percentage points. Unfortunately NVMI wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on NVMI were disappointed as the stock returned 7.1% since the end of March (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 many of these stocks already outperformed the market since 2019.

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