How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Microchip Technology Incorporated (NASDAQ:MCHP) and determine whether hedge funds had an edge regarding this stock.
Microchip Technology Incorporated (NASDAQ:MCHP) was in 33 hedge funds’ portfolios at the end of June. The all time high for this statistics is 46. MCHP investors should pay attention to a decrease in support from the world’s most elite money managers of late. There were 38 hedge funds in our database with MCHP holdings at the end of March. Our calculations also showed that MCHP 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 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 58 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.
Kerr Neilson of Platinum Asset Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap 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. Now let’s take a look at the recent hedge fund action encompassing Microchip Technology Incorporated (NASDAQ:MCHP).
Hedge fund activity in Microchip Technology Incorporated (NASDAQ:MCHP)
At Q2’s end, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in MCHP over the last 20 quarters. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
Among these funds, Platinum Asset Management held the most valuable stake in Microchip Technology Incorporated (NASDAQ:MCHP), which was worth $251.4 million at the end of the third quarter. On the second spot was D E Shaw which amassed $115.2 million worth of shares. Point State Capital, Millennium Management, and Renaissance Technologies 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 Glaxis Capital Management allocated the biggest weight to Microchip Technology Incorporated (NASDAQ:MCHP), around 10.05% of its 13F portfolio. Platinum Asset Management is also relatively very bullish on the stock, dishing out 5.74 percent of its 13F equity portfolio to MCHP.
Because Microchip Technology Incorporated (NASDAQ:MCHP) has witnessed bearish sentiment from the smart money, logic holds that there exists a select few hedgies that decided to sell off their positions entirely by the end of the second quarter. It’s worth mentioning that Joshua Friedman and Mitchell Julis’s Canyon Capital Advisors dropped the largest position of the “upper crust” of funds watched by Insider Monkey, valued at an estimated $51.4 million in stock, and Andrew Wellington and Jeff Keswin’s Lyrical Asset Management was right behind this move, as the fund dropped about $43.2 million worth. These moves are interesting, as total hedge fund interest dropped by 5 funds by the end of the second quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Microchip Technology Incorporated (NASDAQ:MCHP) but similarly valued. We will take a look at Lloyds Banking Group PLC (NYSE:LYG), Franco-Nevada Corporation (NYSE:FNV), Manulife Financial Corporation (NYSE:MFC), AutoZone, Inc. (NYSE:AZO), Yum! Brands, Inc. (NYSE:YUM), Republic Services, Inc. (NYSE:RSG), and KKR & Co Inc. (NYSE:KKR). All of these stocks’ market caps resemble MCHP’s market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LYG,7,14116,-2 FNV,23,1374566,2 MFC,19,171076,-1 AZO,55,2395499,10 YUM,47,1633184,6 RSG,37,821669,5 KKR,45,3339623,-3 Average,33.3,1392819,2.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $1393 million. That figure was $891 million in MCHP’s case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 7 bullish hedge fund positions. Microchip Technology Incorporated (NASDAQ:MCHP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MCHP is 48.6. 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 negative signal and 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately MCHP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MCHP investors were disappointed as the stock returned 4.5% since Q2 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.
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Disclosure: None. This article was originally published at Insider Monkey.