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Hedge Funds Souring On Semtech Corporation (SMTC)

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Semtech Corporation (NASDAQ:SMTC).

Semtech Corporation (NASDAQ:SMTC) has seen a decrease in enthusiasm from smart money in recent months. Our calculations also showed that SMTC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Ken Fisher FISHER ASSET MANAGEMENT

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the new hedge fund action regarding Semtech Corporation (NASDAQ:SMTC).

Hedge fund activity in Semtech Corporation (NASDAQ:SMTC)

Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. On the other hand, there were a total of 13 hedge funds with a bullish position in SMTC a year ago. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is SMTC A Good Stock To Buy?

Among these funds, Fisher Asset Management held the most valuable stake in Semtech Corporation (NASDAQ:SMTC), which was worth $78.4 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $33.8 million worth of shares. Renaissance Technologies, Citadel Investment Group, and Two Sigma Advisors 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 Nishkama Capital allocated the biggest weight to Semtech Corporation (NASDAQ:SMTC), around 0.37% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, dishing out 0.22 percent of its 13F equity portfolio to SMTC.

Judging by the fact that Semtech Corporation (NASDAQ:SMTC) has experienced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there is a sect of money managers that decided to sell off their positions entirely heading into Q4. Interestingly, Principal Global Investors’s Columbus Circle Investors dropped the largest investment of the “upper crust” of funds monitored by Insider Monkey, totaling about $6 million in call options. Dmitry Balyasny’s fund, Balyasny Asset Management, also cut its call options, about $5.4 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to Semtech Corporation (NASDAQ:SMTC). We will take a look at Balchem Corporation (NASDAQ:BCPC), FibroGen Inc (NASDAQ:FGEN), Viavi Solutions Inc (NASDAQ:VIAV), and Intelsat S.A. (NYSE:I). This group of stocks’ market caps are closest to SMTC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BCPC 7 56560 -2
FGEN 24 334669 8
VIAV 30 333312 8
I 48 1063619 6
Average 27.25 447040 5

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $447 million. That figure was $218 million in SMTC’s case. Intelsat S.A. (NYSE:I) is the most popular stock in this table. On the other hand Balchem Corporation (NASDAQ:BCPC) is the least popular one with only 7 bullish hedge fund positions. Semtech Corporation (NASDAQ:SMTC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SMTC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SMTC investors were disappointed as the stock returned -0.3% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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