5 Ways Hedge Funds Are Playing the Trillion Dollar Internet of Things Trend

The internet of things is more than a buzz word. It’s more than just a network that connects smart devices enabled by network connectivity and software. It’s a billion dollar market that’s growing fast. According to some estimates, the internet of things will include over 30 billion devices  by the end of next year, and amount to a trillion dollar market as soon as sometime in the next decade. Given the large potential, many smart money funds have sought some exposure to the internet of things trend. In this article, let’s analyze five stocks that hedge funds and other institutions hold that give them exposure to the internet of things.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

Prem Watsa, Fairfax Financial Holdings

Sierra Wireless, Inc. (NASDAQ:SWIR) offers IoT exposure because it provides programmable IoT gateways and fully certified modems to remotely manage products among other things. Despite its Internet of Things exposure, the stock has had some trouble over the past four quarters, falling around 25% as some investors think 2019 might be a ‘transition year’. In the middle of February, Thanos Moschopoulos trimmed his price target on Sierra Wireless to $13 from the previous $21 due to a ‘large guidance miss’ and some mixed fourth quarter results. 2% of Sierra Wireless’ float is short, indicating that few hedge funds are betting against it.

Cypress Semiconductor Corporation (NASDAQ:CY)‘s wireless technologies such as its wireless MCUs PSoC 6 Microcontrollers were built for the IoT. The company also offers memory products to deliver reliability and performance for various medical, industrial and automotive IoT applications. Of the around 700-740 elite funds we track, 23 funds owned $220.14 million of Cypress Semiconductor Corporation (NASDAQ:CY) on December 31, versus 24 funds and $162.26 million respectively on September 30.

Synaptics Incorporated (NASDAQ:SYNA) is a player in the consumer IoT market, that’s fast growing, and the company has made some acquisitions in 2017 to accelerate its expansion into the consumer IoT space. The company’s voice and audio processing solutions enable a new category of digital personal assistants, and Wall Street is somewhat bullish, with an average target price of $43.44 per share. The smart money might be a little more cautious, however, as around 21% of SYNA’s float is short.

Intel Corporation (NASDAQ:INTC) is more than just a datacenter and PC semiconductor company. It’s also an IoT play as Intel’s internet of things group reported net sales of over $3.45 billion for the twelve months ended December 29 2018, versus 3.169 billion for the twelve months ended Deceber 30, 2017. 65 elite funds we track were long Intel Corporation (NASDAQ:INTC) as of the most recent 13-F reporting period.

General Electric Company (NYSE:GE) is another IoT play. GE helps build industrial internet of things applications that bring together analytics, predictive software, and other solutions to increase industrial productivity, efficiency and performance. GE estimates that the industrial internet could be worth as much as $225 billion by next year and the company has created GE digitial to try and tap that market. Prem Watsa’s fund reported a stake of over 1.39 million shares at the end of 2018.