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Did Hedge Funds Make The Right Call On Semtech Corporation (SMTC) ?

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 Semtech Corporation (NASDAQ:SMTC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Semtech Corporation (NASDAQ:SMTC) investors should pay attention to an increase in hedge fund interest recently. SMTC was in 17 hedge funds’ portfolios at the end of March. There were 12 hedge funds in our database with SMTC holdings at the end of the previous quarter. Our calculations also showed that SMTC 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

Ken Griffin

Ken Griffin of Citadel Investment Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s review the key hedge fund action surrounding Semtech Corporation (NASDAQ:SMTC).

How are hedge funds trading Semtech Corporation (NASDAQ:SMTC)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 42% from the fourth quarter of 2019. By comparison, 19 hedge funds held shares or bullish call options in SMTC a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SMTC A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the largest position in Semtech Corporation (NASDAQ:SMTC). Fisher Asset Management has a $52.1 million position in the stock, comprising 0.1% of its 13F portfolio. The second most bullish fund manager is Citadel Investment Group, managed by Ken Griffin, which holds a $15.6 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other peers that are bullish contain Renaissance Technologies, Cliff Asness’s AQR Capital Management and Michael Rockefeller and KarláKroeker’s Woodline Partners. In terms of the portfolio weights assigned to each position Woodline Partners allocated the biggest weight to Semtech Corporation (NASDAQ:SMTC), around 0.67% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, dishing out 0.52 percent of its 13F equity portfolio to SMTC.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into Semtech Corporation (NASDAQ:SMTC) headfirst. Citadel Investment Group, managed by Ken Griffin, created the biggest position in Semtech Corporation (NASDAQ:SMTC). Citadel Investment Group had $15.6 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $8.6 million investment in the stock during the quarter. The following funds were also among the new SMTC investors: Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Matthew Hulsizer’s PEAK6 Capital Management, and Brandon Haley’s Holocene Advisors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Semtech Corporation (NASDAQ:SMTC) but similarly valued. These stocks are EQM Midstream Partners, LP (NYSE:EQM), The Timken Company (NYSE:TKR), Shenandoah Telecommunications Company (NASDAQ:SHEN), and Toll Brothers Inc (NYSE:TOL). All of these stocks’ market caps are similar to SMTC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EQM 6 15334 -5
TKR 30 262596 -10
SHEN 11 97332 1
TOL 20 238559 -11
Average 16.75 153455 -6.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $153 million. That figure was $146 million in SMTC’s case. The Timken Company (NYSE:TKR) is the most popular stock in this table. On the other hand EQM Midstream Partners, LP (NYSE:EQM) is the least popular one with only 6 bullish hedge fund positions. Semtech Corporation (NASDAQ:SMTC) is not the most popular stock in this group but hedge fund interest is still above 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on SMTC as the stock returned 44% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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