Arrow Electronics, Inc. (ARW) Fell Out Of Favor With Hedge Funds

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 Arrow Electronics, Inc. (NYSE:ARW).

Arrow Electronics, Inc. (NYSE:ARW) was in 23 hedge funds’ portfolios at the end of March. The all time high for this statistic is 34. ARW investors should be aware of a decrease in hedge fund interest lately. There were 27 hedge funds in our database with ARW positions at the end of the fourth quarter. Our calculations also showed that ARW isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 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 more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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. With all of this in mind let’s take a glance at the key hedge fund action encompassing Arrow Electronics, Inc. (NYSE:ARW).

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

At the end of March, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ARW over the last 23 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in Arrow Electronics, Inc. (NYSE:ARW), which was worth $338.7 million at the end of the fourth quarter. On the second spot was Lyrical Asset Management which amassed $201.3 million worth of shares. Arrowstreet Capital, Polaris Capital Management, and Pzena Investment 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 Force Hill Capital Management allocated the biggest weight to Arrow Electronics, Inc. (NYSE:ARW), around 2.97% of its 13F portfolio. Lyrical Asset Management is also relatively very bullish on the stock, dishing out 2.36 percent of its 13F equity portfolio to ARW.

Since Arrow Electronics, Inc. (NYSE:ARW) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of fund managers who sold off their positions entirely last quarter. It’s worth mentioning that Ken Griffin’s Citadel Investment Group dropped the largest investment of the 750 funds monitored by Insider Monkey, valued at about $28.3 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund cut about $17.4 million worth. These moves are important to note, as total hedge fund interest dropped by 4 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Arrow Electronics, Inc. (NYSE:ARW). These stocks are Lightspeed POS Inc. (NYSE:LSPD), Berry Global Group Inc (NYSE:BERY), Globant SA (NYSE:GLOB), Acceleron Pharma Inc (NASDAQ:XLRN), Beyond Meat, Inc. (NASDAQ:BYND), Polaris Inc. (NYSE:PII), and Ares Capital Corporation (NASDAQ:ARCC). All of these stocks’ market caps resemble ARW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LSPD 21 643714 1
BERY 42 1404006 8
GLOB 17 323406 2
XLRN 31 1647100 -3
BYND 26 338693 -1
PII 29 510308 -2
ARCC 15 84000 0
Average 25.9 707318 0.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.9 hedge funds with bullish positions and the average amount invested in these stocks was $707 million. That figure was $768 million in ARW’s case. Berry Global Group Inc (NYSE:BERY) is the most popular stock in this table. On the other hand Ares Capital Corporation (NASDAQ:ARCC) is the least popular one with only 15 bullish hedge fund positions. Arrow Electronics, Inc. (NYSE:ARW) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ARW is 36.1. 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 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 23.8% in 2021 through July 16th and surpassed the market again by 7.7 percentage points. Unfortunately ARW wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); ARW investors were disappointed as the stock returned -0.9% since the end of March (through 7/16) 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 most of these stocks already outperformed the market in 2021.

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