Hedge Funds Are Souring On Cadence Design Systems Inc (CDNS)

In this article we will take a look at whether hedge funds think Cadence Design Systems Inc (NASDAQ:CDNS) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Cadence Design Systems Inc (NASDAQ:CDNS) was in 30 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 42. CDNS has seen a decrease in enthusiasm from smart money of late. There were 32 hedge funds in our database with CDNS holdings at the end of December. Our calculations also showed that CDNS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Ian Wace Marshall Wace

Ian Wace of Marshall Wace

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. Now let’s review the key hedge fund action surrounding Cadence Design Systems Inc (NASDAQ:CDNS).

Do Hedge Funds Think CDNS Is A Good Stock To Buy Now?

At Q1’s end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. By comparison, 31 hedge funds held shares or bullish call options in CDNS a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Alkeon Capital Management, managed by Panayotis Takis Sparaggis, holds the largest position in Cadence Design Systems Inc (NASDAQ:CDNS). Alkeon Capital Management has a $787.3 million position in the stock, comprising 1.2% of its 13F portfolio. Coming in second is Impax Asset Management, managed by Ian Simm, which holds a $252.3 million position; 1.3% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that are bullish contain Brian Ashford-Russell and Tim Woolley’s Polar Capital, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Mondrian Capital allocated the biggest weight to Cadence Design Systems Inc (NASDAQ:CDNS), around 3.11% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, designating 1.29 percent of its 13F equity portfolio to CDNS.

Seeing as Cadence Design Systems Inc (NASDAQ:CDNS) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few money managers who were dropping their entire stakes last quarter. Intriguingly, Ryan Caldwell’s Chiron Investment Management cut the biggest stake of the 750 funds monitored by Insider Monkey, valued at close to $14.1 million in stock, and Joseph Samuels’s Islet Management was right behind this move, as the fund dropped about $13.6 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Cadence Design Systems Inc (NASDAQ:CDNS). These stocks are Schlumberger Limited. (NYSE:SLB), Cummins Inc. (NYSE:CMI), The Travelers Companies Inc (NYSE:TRV), DocuSign, Inc. (NASDAQ:DOCU), Synopsys, Inc. (NASDAQ:SNPS), Kinder Morgan Inc (NYSE:KMI), and General Mills, Inc. (NYSE:GIS). All of these stocks’ market caps match CDNS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SLB 50 1141533 0
CMI 37 817545 -8
TRV 35 409418 1
DOCU 60 3232494 -7
SNPS 34 1655845 -6
KMI 38 1194030 -4
GIS 31 797434 -8
Average 40.7 1321186 -4.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.7 hedge funds with bullish positions and the average amount invested in these stocks was $1321 million. That figure was $1491 million in CDNS’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand General Mills, Inc. (NYSE:GIS) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Cadence Design Systems Inc (NASDAQ:CDNS) is even less popular than GIS. Our overall hedge fund sentiment score for CDNS is 24.4. 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. Hedge funds dodged a bullet by taking a bearish stance towards CDNS. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.8% in 2021 through July 2nd but managed to beat the market again by 6 percentage points. Unfortunately CDNS wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); CDNS investors were disappointed as the stock returned 0.7% since the end of the first quarter (through 7/2) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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