Is New Oriental Education & Tech Group Inc. (EDU) Going to Burn These Hedge Funds?

Reymerlyn Martin

Updated Sun, Dec 9, 2018, 5:31 PM

The 700+ hedge funds and money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the second quarter, which unveil their equity positions as of September 30. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund positions. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards New Oriental Education & Tech Group Inc. (NYSE:EDU).

New Oriental Education & Tech Group Inc. (NYSE:EDU) investors should be aware of a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that EDU isn't among the 30 most popular stocks among hedge funds.

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 the 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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.

Let's take a peek at the latest hedge fund action encompassing New Oriental Education & Tech Group Inc. (NYSE:EDU).

How have hedgies been trading New Oriental Education & Tech Group Inc. (NYSE:EDU)?

Heading into the fourth quarter of 2018, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from one quarter earlier. On the other hand, there were a total of 29 hedge funds with a bullish position in EDU at the beginning of this year. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Melvin Capital Management held the most valuable stake in New Oriental Education & Tech Group Inc. (NYSE:EDU), which was worth $232.8 million at the end of the third quarter. On the second spot was Tiger Global Management LLC which amassed $225.8 million worth of shares. Moreover, Melvin Capital Management, Renaissance Technologies, and Citadel Investment Group were also bullish on New Oriental Education & Tech Group Inc. (NYSE:EDU), allocating a large percentage of their portfolios to this stock.

Since New Oriental Education & Tech Group Inc. (NYSE:EDU) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedge funds that elected to cut their full holdings by the end of the third quarter. Interestingly, J Kevin Kenny Jr's Emerging Sovereign Group cut the largest investment of the "upper crust" of funds tracked by Insider Monkey, comprising an estimated $53.5 million in stock, and David Tepper's Appaloosa Management LP was right behind this move, as the fund dropped about $34.1 million worth. These transactions are important to note, as total hedge fund interest dropped by 7 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as New Oriental Education & Tech Group Inc. (NYSE:EDU) but similarly valued. We will take a look at Franco-Nevada Corporation (NYSE:FNV), Kansas City Southern (NYSE:KSU), IDEX Corporation (NYSE:IEX), and Braskem SA (NYSE:BAK). All of these stocks' market caps are similar to EDU's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FNV,16,365669,1 KSU,24,363531,-2 IEX,23,357504,5 BAK,13,401115,-4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $372 million. That figure was $915 million in EDU's case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand Braskem SA (NYSE:BAK) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks New Oriental Education & Tech Group Inc. (NYSE:EDU) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

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

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