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Hedge Funds Are Nibbling On Palo Alto Networks Inc (PANW)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Palo Alto Networks Inc (NYSE:PANW) and determine whether the smart money was really smart about this stock.

Is Palo Alto Networks Inc (NYSE:PANW) a buy here? The smart money was taking an optimistic view. The number of bullish hedge fund positions went up by 4 recently. Palo Alto Networks Inc (NYSE:PANW) was in 51 hedge funds’ portfolios at the end of June. Our calculations also showed that PANW isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

David Blood

David Blood of Generation Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. 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. With all of this in mind let’s take a peek at the new hedge fund action surrounding Palo Alto Networks Inc (NYSE:PANW).

Hedge fund activity in Palo Alto Networks Inc (NYSE:PANW)

At Q2’s end, a total of 51 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PANW over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of Palo Alto Networks Inc (NYSE:PANW), with a stake worth $1146.1 million reported as of the end of September. Trailing Renaissance Technologies was Generation Investment Management, which amassed a stake valued at $767 million. SRS Investment Management, D E Shaw, and Farallon 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 Harvard Management Co allocated the biggest weight to Palo Alto Networks Inc (NYSE:PANW), around 17.14% of its 13F portfolio. Crosslink Capital is also relatively very bullish on the stock, dishing out 5.97 percent of its 13F equity portfolio to PANW.

As industrywide interest jumped, some big names have been driving this bullishness. Alta Park Capital, managed by Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali, created the largest position in Palo Alto Networks Inc (NYSE:PANW). Alta Park Capital had $23.7 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital also initiated a $8.8 million position during the quarter. The following funds were also among the new PANW investors: Mendel Hui’s Isomer Partners, George Soros’s Soros Fund Management, and Highbridge Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to Palo Alto Networks Inc (NYSE:PANW). These stocks are Genmab A/S (NASDAQ:GMAB), Dollar Tree, Inc. (NASDAQ:DLTR), LyondellBasell Industries NV (NYSE:LYB), Equity Residential (NYSE:EQR), AvalonBay Communities Inc (NYSE:AVB), Tyson Foods, Inc. (NYSE:TSN), and Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK). This group of stocks’ market valuations are similar to PANW’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GMAB 15 243405 1
DLTR 60 2268495 18
LYB 32 509614 -3
EQR 33 555124 9
AVB 34 1283293 4
TSN 37 649082 -4
TLK 4 166226 -3
Average 30.7 810748 3.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.7 hedge funds with bullish positions and the average amount invested in these stocks was $811 million. That figure was $3588 million in PANW’s case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK) is the least popular one with only 4 bullish hedge fund positions. Palo Alto Networks Inc (NYSE:PANW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PANW is 81. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately PANW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PANW were disappointed as the stock returned 12.1% 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.