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Hedge Funds Dropped The Ball On Teradyne, Inc. (TER)?

During the fourth quarter the Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 7 percentage points as investors worried over the possible ramifications of rising interest rates. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Teradyne, Inc. (NASDAQ:TER) and see how the stock is affected by the recent hedge fund activity.

Hedge fund interest in Teradyne, Inc. (NASDAQ:TER) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare TER to other stocks including Cullen/Frost Bankers, Inc. (NYSE:CFR), Crown Holdings, Inc. (NYSE:CCK), and Royal Gold, Inc (NASDAQ:RGLD) to get a better sense of its popularity.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

GOTHAM ASSET MANAGEMENT

Let’s take a look at the recent hedge fund action regarding Teradyne, Inc. (NASDAQ:TER).

How have hedgies been trading Teradyne, Inc. (NASDAQ:TER)?

At Q4’s end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 29 hedge funds held shares or bullish call options in TER a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

TER_apr2019

The largest stake in Teradyne, Inc. (NASDAQ:TER) was held by Alkeon Capital Management, which reported holding $93.7 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $58.7 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Royce & Associates.

Seeing as Teradyne, Inc. (NASDAQ:TER) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there exists a select few money managers that decided to sell off their full holdings in the third quarter. It’s worth mentioning that Doug Silverman and Alexander Klabin’s Senator Investment Group dumped the biggest stake of the “upper crust” of funds followed by Insider Monkey, valued at an estimated $46.2 million in call options, and Panayotis Takis Sparaggis’s Alkeon Capital Management was right behind this move, as the fund said goodbye to about $18.5 million worth. These moves 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 Teradyne, Inc. (NASDAQ:TER). We will take a look at Cullen/Frost Bankers, Inc. (NYSE:CFR), Crown Holdings, Inc. (NYSE:CCK), Royal Gold, Inc (NASDAQ:RGLD), and Jefferies Financial Group Inc. (NYSE:JEF). This group of stocks’ market valuations match TER’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CFR 18 71492 0
CCK 35 718268 2
RGLD 15 57935 -2
JEF 36 607137 -3
Average 26 363708 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $364 million. That figure was $411 million in TER’s case. Jefferies Financial Group Inc. (NYSE:JEF) is the most popular stock in this table. On the other hand Royal Gold, Inc (NASDAQ:RGLD) is the least popular one with only 15 bullish hedge fund positions. Teradyne, Inc. (NASDAQ:TER) is not the least popular stock in this group but hedge fund interest is still below average. Hedge funds dropped the ball on TER as the stock returned more than 40% and outperformed the market by 25 percentage points this year. It isn’t all bad news for hedge funds though. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points.

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

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