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Did Hedge Funds Make The Right Call On Maxim Integrated Products Inc. (MXIM)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Maxim Integrated Products Inc. (NASDAQ:MXIM) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Maxim Integrated Products Inc. (NASDAQ:MXIM) has experienced a decrease in enthusiasm from smart money lately. MXIM was in 30 hedge funds’ portfolios at the end of March. There were 32 hedge funds in our database with MXIM positions at the end of the previous quarter. Our calculations also showed that MXIM 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.

Lee Ainslie MAVERICK CAPITAL

Lee Ainslie of Maverick Capital

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. Now we’re going to take a glance at the latest hedge fund action surrounding Maxim Integrated Products Inc. (NASDAQ:MXIM).

What have hedge funds been doing with Maxim Integrated Products Inc. (NASDAQ:MXIM)?

At the end of the first quarter, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in MXIM over the last 18 quarters. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in Maxim Integrated Products Inc. (NASDAQ:MXIM) was held by AQR Capital Management, which reported holding $49.4 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $36.7 million position. Other investors bullish on the company included Whale Rock Capital Management, Point72 Asset Management, and D E Shaw. In terms of the portfolio weights assigned to each position Prospector Partners allocated the biggest weight to Maxim Integrated Products Inc. (NASDAQ:MXIM), around 1.71% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, earmarking 0.94 percent of its 13F equity portfolio to MXIM.

Because Maxim Integrated Products Inc. (NASDAQ:MXIM) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of hedge funds that elected to cut their entire stakes heading into Q4. Interestingly, Renaissance Technologies said goodbye to the largest position of all the hedgies watched by Insider Monkey, comprising an estimated $63.1 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also sold off its stock, about $5.6 million worth. These transactions are interesting, as total hedge fund interest fell by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Maxim Integrated Products Inc. (NASDAQ:MXIM) but similarly valued. These stocks are CGI Inc. (NYSE:GIB), Cheniere Energy Partners LP (NYSE:CQP), iQIYI, Inc. (NASDAQ:IQ), and Amcor plc (NYSE:AMCR). All of these stocks’ market caps are closest to MXIM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GIB 18 246597 -1
CQP 3 814865 -4
IQ 28 983179 10
AMCR 19 208401 9
Average 17 563261 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $563 million. That figure was $214 million in MXIM’s case. iQIYI, Inc. (NASDAQ:IQ) is the most popular stock in this table. On the other hand Cheniere Energy Partners LP (NYSE:CQP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Maxim Integrated Products Inc. (NASDAQ:MXIM) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on MXIM as the stock returned 25.7% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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