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Did Hedge Funds Make The Right Call On Cadence Design Systems Inc (CDNS) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtCadence Design Systems Inc (NASDAQ:CDNS) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Cadence Design Systems Inc (NASDAQ:CDNS) was in 31 hedge funds’ portfolios at the end of the first quarter of 2020. CDNS investors should pay attention to a decrease in support from the world’s most elite money managers in recent months. There were 42 hedge funds in our database with CDNS positions at the end of the previous quarter. Our calculations also showed that CDNS 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).

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

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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind let’s view the key hedge fund action encompassing Cadence Design Systems Inc (NASDAQ:CDNS).

How are hedge funds trading Cadence Design Systems Inc (NASDAQ:CDNS)?

At the end of the first quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -26% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CDNS over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Is CDNS A Good Stock To Buy?

The largest stake in Cadence Design Systems Inc (NASDAQ:CDNS) was held by Alkeon Capital Management, which reported holding $339.6 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $261.8 million position. Other investors bullish on the company included AQR Capital Management, GLG Partners, and Lone Pine Capital. In terms of the portfolio weights assigned to each position Lunia Capital allocated the biggest weight to Cadence Design Systems Inc (NASDAQ:CDNS), around 2.7% of its 13F portfolio. Alkeon Capital Management is also relatively very bullish on the stock, earmarking 1.45 percent of its 13F equity portfolio to CDNS.

Seeing as Cadence Design Systems Inc (NASDAQ:CDNS) has faced a decline in interest from hedge fund managers, it’s safe to say that there lies a certain “tier” of money managers who were dropping their positions entirely last quarter. It’s worth mentioning that Renaissance Technologies dumped the largest position of the 750 funds watched by Insider Monkey, totaling close to $12.4 million in stock. Leon Shaulov’s fund, Maplelane Capital, also cut its stock, about $6.9 million worth. These transactions are important to note, as total hedge fund interest dropped by 11 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Cadence Design Systems Inc (NASDAQ:CDNS) but similarly valued. These stocks are Valero Energy Corporation (NYSE:VLO), RingCentral Inc (NYSE:RNG), Southwest Airlines Co. (NYSE:LUV), and DTE Energy Company (NYSE:DTE). All of these stocks’ market caps are closest to CDNS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VLO 45 275743 -1
RNG 67 2827940 5
LUV 45 2344803 1
DTE 29 516788 -6
Average 46.5 1491319 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 46.5 hedge funds with bullish positions and the average amount invested in these stocks was $1491 million. That figure was $1340 million in CDNS’s case. RingCentral Inc (NYSE:RNG) is the most popular stock in this table. On the other hand DTE Energy Company (NYSE:DTE) is the least popular one with only 29 bullish hedge fund positions. Cadence Design Systems Inc (NASDAQ:CDNS) is not the least popular stock in this group but hedge fund interest is still below average. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on CDNS as the stock returned 45.3% during the second quarter and outperformed the market by an even larger margin.

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