We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Inphi Corporation (NYSE:IPHI)? The smart money sentiment can provide an answer to this question.
Inphi Corporation (NYSE:IPHI) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 31 hedge funds’ portfolios at the end of December. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Watts Water Technologies Inc (NYSE:WTS), UMB Financial Corporation (NASDAQ:UMBF), and MyoKardia, Inc. (NASDAQ:MYOK) to gather more data points. Our calculations also showed that IPHI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a glance at the latest hedge fund action encompassing Inphi Corporation (NYSE:IPHI).
Hedge fund activity in Inphi Corporation (NYSE:IPHI)
Heading into the first quarter of 2020, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards IPHI over the last 18 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the most valuable position in Inphi Corporation (NYSE:IPHI). Citadel Investment Group has a $102 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is of Renaissance Technologies, with a $62 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, John Overdeck and David Siegel’s Two Sigma Advisors and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Cavalry Asset Management allocated the biggest weight to Inphi Corporation (NYSE:IPHI), around 6.07% of its 13F portfolio. Boardman Bay Capital Management is also relatively very bullish on the stock, designating 1.65 percent of its 13F equity portfolio to IPHI.
Seeing as Inphi Corporation (NYSE:IPHI) has experienced bearish sentiment from hedge fund managers, we can see that there were a few funds who were dropping their full holdings in the third quarter. At the top of the heap, Lee Ainslie’s Maverick Capital dropped the largest stake of the “upper crust” of funds tracked by Insider Monkey, worth close to $27.9 million in stock, and Phill Gross and Robert Atchinson’s Adage Capital Management was right behind this move, as the fund said goodbye to about $22.4 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks similar to Inphi Corporation (NYSE:IPHI). We will take a look at Watts Water Technologies Inc (NYSE:WTS), UMB Financial Corporation (NASDAQ:UMBF), MyoKardia, Inc. (NASDAQ:MYOK), and GrafTech International Ltd. (NYSE:EAF). This group of stocks’ market values are similar to IPHI’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $392 million. That figure was $450 million in IPHI’s case. GrafTech International Ltd. (NYSE:EAF) is the most popular stock in this table. On the other hand Watts Water Technologies Inc (NYSE:WTS) is the least popular one with only 19 bullish hedge fund positions. Inphi Corporation (NYSE:IPHI) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. Hedge funds were also right about betting on IPHI as the stock returned 1.4% during the first quarter (through March 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.