Did Hedge Funds Make The Right Call On Fortinet Inc (FTNT) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Fortinet Inc (NASDAQ:FTNT) and determine whether hedge funds skillfully traded this stock.

Fortinet Inc (NASDAQ:FTNT) shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that FTNT 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Roger Ibbotson of Zebra Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the fresh hedge fund action surrounding Fortinet Inc (NASDAQ:FTNT).

What have hedge funds been doing with Fortinet Inc (NASDAQ:FTNT)?

At the end of the first quarter, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the fourth quarter of 2019. By comparison, 34 hedge funds held shares or bullish call options in FTNT a year ago. With hedge funds’ sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Fortinet Inc (NASDAQ:FTNT), with a stake worth $613.5 million reported as of the end of September. Trailing Renaissance Technologies was Whale Rock Capital Management, which amassed a stake valued at $294 million. Arrowstreet Capital, AQR Capital Management, and Two Sigma Advisors 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 Blue Harbour Group allocated the biggest weight to Fortinet Inc (NASDAQ:FTNT), around 11.23% of its 13F portfolio. Whale Rock Capital Management is also relatively very bullish on the stock, dishing out 4.01 percent of its 13F equity portfolio to FTNT.

Seeing as Fortinet Inc (NASDAQ:FTNT) has faced falling interest from the entirety of the hedge funds we track, logic holds that there were a few funds who were dropping their positions entirely heading into Q4. Interestingly, Ken Griffin’s Citadel Investment Group said goodbye to the largest stake of all the hedgies watched by Insider Monkey, worth close to $38.1 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund sold off about $33.7 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 13 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to Fortinet Inc (NASDAQ:FTNT). We will take a look at Nokia Corporation (NYSE:NOK), Dollar Tree, Inc. (NASDAQ:DLTR), Citrix Systems, Inc. (NASDAQ:CTXS), and Alexandria Real Estate Equities Inc (NYSE:ARE). This group of stocks’ market values match FTNT’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NOK 23 178356 7
DLTR 42 1353619 -9
CTXS 38 1418404 4
ARE 29 196351 8
Average 33 786683 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $787 million. That figure was $1465 million in FTNT’s case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand Nokia Corporation (NYSE:NOK) is the least popular one with only 23 bullish hedge fund positions. Fortinet Inc (NASDAQ:FTNT) 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 FTNT as the stock returned 35.7% 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.