Did Hedge Funds Make The Right Call On Synaptics Incorporated (SYNA) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Synaptics Incorporated (NASDAQ:SYNA) and determine whether hedge funds had an edge regarding this stock.

Synaptics Incorporated (NASDAQ:SYNA) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 26 hedge funds’ portfolios at the end of March. At the end of this article we will also compare SYNA to other stocks including Coca-Cola Consolidated Inc. (NASDAQ:COKE), Principia Biopharma Inc. (NASDAQ:PRNB), and Steven Madden, Ltd. (NASDAQ:SHOO) to get a better sense of its popularity.

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.

Richard Driehaus of Driehaus Capital

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. With all of this in mind we’re going to take a glance at the recent hedge fund action encompassing Synaptics Incorporated (NASDAQ:SYNA).

How have hedgies been trading Synaptics Incorporated (NASDAQ:SYNA)?

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. On the other hand, there were a total of 21 hedge funds with a bullish position in SYNA a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Fisher Asset Management held the most valuable stake in Synaptics Incorporated (NASDAQ:SYNA), which was worth $93.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $72.7 million worth of shares. D E Shaw, Citadel Investment Group, and AQR Capital 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 Weld Capital Management allocated the biggest weight to Synaptics Incorporated (NASDAQ:SYNA), around 0.6% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, earmarking 0.31 percent of its 13F equity portfolio to SYNA.

Due to the fact that Synaptics Incorporated (NASDAQ:SYNA) has witnessed declining sentiment from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedgies that slashed their full holdings by the end of the first quarter. At the top of the heap, Cynthia Paul’s Lynrock Lake sold off the biggest investment of the 750 funds followed by Insider Monkey, totaling about $132.5 million in stock, and Highbridge Capital Management was right behind this move, as the fund cut about $19.5 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Synaptics Incorporated (NASDAQ:SYNA). These stocks are Coca-Cola Consolidated Inc. (NASDAQ:COKE), Principia Biopharma Inc. (NASDAQ:PRNB), Steven Madden, Ltd. (NASDAQ:SHOO), and Varonis Systems Inc (NASDAQ:VRNS). This group of stocks’ market valuations match SYNA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
COKE 9 14446 -2
PRNB 21 734674 1
SHOO 18 58658 -4
VRNS 20 387926 2
Average 17 298926 -0.75

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 $299 million. That figure was $346 million in SYNA’s case. Principia Biopharma Inc. (NASDAQ:PRNB) is the most popular stock in this table. On the other hand Coca-Cola Consolidated Inc. (NASDAQ:COKE) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Synaptics Incorporated (NASDAQ:SYNA) 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately SYNA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SYNA were disappointed as the stock returned 3.9% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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