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Did Hedge Funds Make The Right Call On Tech Data Corp (TECD) ?

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 Tech Data Corp (NASDAQ:TECD) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Tech Data Corp (NASDAQ:TECD) was in 39 hedge funds’ portfolios at the end of March. TECD investors should pay attention to an increase in hedge fund interest recently. There were 34 hedge funds in our database with TECD positions at the end of the previous quarter. Our calculations also showed that TECD 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.

Matthew Halbower Pentwater Capital

Matthew Halbower of Pentwater 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. With all of this in mind we’re going to take a look at the fresh hedge fund action regarding Tech Data Corp (NASDAQ:TECD).

How are hedge funds trading Tech Data Corp (NASDAQ:TECD)?

Heading into the second quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TECD over the last 18 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, TIG Advisors was the largest shareholder of Tech Data Corp (NASDAQ:TECD), with a stake worth $131 million reported as of the end of September. Trailing TIG Advisors was Water Island Capital, which amassed a stake valued at $120.7 million. Alpine Associates, Pentwater Capital Management, and TOMS Capital 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 Beryl Capital Management allocated the biggest weight to Tech Data Corp (NASDAQ:TECD), around 13.69% of its 13F portfolio. Water Island Capital is also relatively very bullish on the stock, setting aside 8.72 percent of its 13F equity portfolio to TECD.

Now, key hedge funds have been driving this bullishness. TIG Advisors, managed by Carl Tiedemann and Michael Tiedemann, created the largest position in Tech Data Corp (NASDAQ:TECD). TIG Advisors had $131 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $21.4 million position during the quarter. The other funds with new positions in the stock are Benjamin Pass’s TOMS Capital, James Dinan’s York Capital Management, and Steven Clark’s Omni Partners.

Let’s now take a look at hedge fund activity in other stocks similar to Tech Data Corp (NASDAQ:TECD). We will take a look at Old Republic International Corporation (NYSE:ORI), Caesars Entertainment Corp (NASDAQ:CZR), HD Supply Holdings Inc (NASDAQ:HDS), and Euronet Worldwide, Inc. (NASDAQ:EEFT). This group of stocks’ market valuations match TECD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ORI 27 241456 7
CZR 47 2040793 1
HDS 40 856283 2
EEFT 30 240212 -17
Average 36 844686 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 36 hedge funds with bullish positions and the average amount invested in these stocks was $845 million. That figure was $797 million in TECD’s case. Caesars Entertainment Corp (NASDAQ:CZR) is the most popular stock in this table. On the other hand Old Republic International Corporation (NYSE:ORI) is the least popular one with only 27 bullish hedge fund positions. Tech Data Corp (NASDAQ:TECD) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 but beat the market by 15.5 percentage points. Unfortunately TECD wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TECD were disappointed as the stock returned 10.7% during the same time period 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 many of these stocks already outperformed the market so far this year.

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