Were Hedge Funds Right About Selling Nelnet, Inc. (NNI)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Nelnet, Inc. (NYSE:NNI) based on that data and determine whether they were really smart about the stock.

Is Nelnet, Inc. (NYSE:NNI) a bargain? Investors who are in the know were getting less bullish. The number of long hedge fund positions went down by 1 recently. Our calculations also showed that NNI isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). NNI was in 13 hedge funds’ portfolios at the end of the first quarter of 2020. There were 14 hedge funds in our database with NNI positions at the end of the previous quarter.

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

According to most shareholders, hedge funds are perceived as slow, outdated investment vehicles of years past. While there are greater than 8000 funds trading at the moment, Our researchers look at the bigwigs of this group, about 850 funds. These investment experts shepherd the majority of all hedge funds’ total capital, and by tailing their highest performing picks, Insider Monkey has uncovered several investment strategies that have historically outperformed the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Fred DiSanto of Ancora Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 12 largest cement producing countries to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a gander at the key hedge fund action surrounding Nelnet, Inc. (NYSE:NNI).

How have hedgies been trading Nelnet, Inc. (NYSE:NNI)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the fourth quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in NNI 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.

The largest stake in Nelnet, Inc. (NYSE:NNI) was held by Magnolia Capital Fund, which reported holding $54.9 million worth of stock at the end of September. It was followed by Harspring Capital Management with a $15 million position. Other investors bullish on the company included Tegean Capital Management, Millennium Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Magnolia Capital Fund allocated the biggest weight to Nelnet, Inc. (NYSE:NNI), around 8.65% of its 13F portfolio. Harspring Capital Management is also relatively very bullish on the stock, earmarking 8.36 percent of its 13F equity portfolio to NNI.

Because Nelnet, Inc. (NYSE:NNI) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few funds who sold off their entire stakes heading into Q4. Intriguingly, Phil Frohlich’s Prescott Group Capital Management cut the largest investment of the 750 funds followed by Insider Monkey, worth about $1.5 million in stock.  Renaissance Technologies, also cut its stock, about $1.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 1 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Nelnet, Inc. (NYSE:NNI) but similarly valued. We will take a look at Graham Holdings Co (NYSE:GHC), SmileDirectClub, Inc. (NASDAQ:SDC), Dorman Products Inc. (NASDAQ:DORM), and ExlService Holdings, Inc. (NASDAQ:EXLS). This group of stocks’ market valuations match NNI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $109 million. That figure was $82 million in NNI’s case. Graham Holdings Co (NYSE:GHC) is the most popular stock in this table. On the other hand Dorman Products Inc. (NASDAQ:DORM) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Nelnet, Inc. (NYSE:NNI) is even less popular than DORM. Hedge funds dodged a bullet by taking a bearish stance towards NNI. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th but managed to beat the market by 16.8 percentage points. Unfortunately NNI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); NNI investors were disappointed as the stock returned 0.9% during the second quarter (through June 25th) 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 so far in 2020.

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