How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding MKS Instruments, Inc. (NASDAQ:MKSI) and determine whether hedge funds had an edge regarding this stock.
MKS Instruments, Inc. (NASDAQ:MKSI) was in 32 hedge funds’ portfolios at the end of June. The all time high for this statistics is 30. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. MKSI has seen an increase in enthusiasm from smart money in recent months. There were 27 hedge funds in our database with MKSI positions at the end of the first quarter. Our calculations also showed that MKSI 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. Now we’re going to take a look at the key hedge fund action regarding MKS Instruments, Inc. (NASDAQ:MKSI).
How are hedge funds trading MKS Instruments, Inc. (NASDAQ:MKSI)?
Heading into the third quarter of 2020, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MKSI over the last 20 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the number one position in MKS Instruments, Inc. (NASDAQ:MKSI). Royce & Associates has a $113.2 million position in the stock, comprising 1.2% of its 13F portfolio. On Royce & Associates’s heels is Fisher Asset Management, managed by Ken Fisher, which holds a $65.5 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions encompass Tim Curro’s Value Holdings LP, Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital and Principal Global Investors’s Columbus Circle Investors. In terms of the portfolio weights assigned to each position Value Holdings LP allocated the biggest weight to MKS Instruments, Inc. (NASDAQ:MKSI), around 13.25% of its 13F portfolio. BeaconLight Capital is also relatively very bullish on the stock, earmarking 3.77 percent of its 13F equity portfolio to MKSI.
Now, key hedge funds were breaking ground themselves. Shellback Capital, managed by Doug Gordon, Jon Hilsabeck and Don Jabro, created the largest position in MKS Instruments, Inc. (NASDAQ:MKSI). Shellback Capital had $22.7 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also made a $6.3 million investment in the stock during the quarter. The other funds with brand new MKSI positions are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, John Osterweis’s Osterweis Capital Management, and Michael Gelband’s ExodusPoint Capital.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as MKS Instruments, Inc. (NASDAQ:MKSI) but similarly valued. We will take a look at PRA Health Sciences Inc (NASDAQ:PRAH), Herbalife Nutrition Ltd. (NYSE:HLF), LPL Financial Holdings Inc (NASDAQ:LPLA), BanColombia S.A. (NYSE:CIB), Assurant, Inc. (NYSE:AIZ), Encompass Health Corporation (NYSE:EHC), and ADT Inc. (NYSE:ADT). This group of stocks’ market values resemble MKSI’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 29.3 hedge funds with bullish positions and the average amount invested in these stocks was $816 million. That figure was $330 million in MKSI’s case. LPL Financial Holdings Inc (NASDAQ:LPLA) is the most popular stock in this table. On the other hand BanColombia S.A. (NYSE:CIB) is the least popular one with only 9 bullish hedge fund positions. MKS Instruments, Inc. (NASDAQ:MKSI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MKSI is 73.8. 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 23.8% in 2020 through September 14th and beat the market by 17.6 percentage points. Unfortunately MKSI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MKSI were disappointed as the stock returned -7.6% 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.