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How Did Analog Devices, Inc. (ADI) Compare Against Hedge Fund Darlings in 2019?

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is Analog Devices, Inc. (NASDAQ:ADI) going to take off soon? Prominent investors are in a bearish mood. The number of bullish hedge fund positions fell by 1 lately. Our calculations also showed that ADI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 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.

William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind we’re going to view the recent hedge fund action surrounding Analog Devices, Inc. (NASDAQ:ADI).

What have hedge funds been doing with Analog Devices, Inc. (NASDAQ:ADI)?

Heading into the fourth quarter of 2019, a total of 43 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from the previous quarter. On the other hand, there were a total of 28 hedge funds with a bullish position in ADI a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

More specifically, Cantillon Capital Management was the largest shareholder of Analog Devices, Inc. (NASDAQ:ADI), with a stake worth $565.3 million reported as of the end of September. Trailing Cantillon Capital Management was Generation Investment Management, which amassed a stake valued at $521.6 million. First Pacific Advisors, Alkeon Capital Management, and Adage Capital Management 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 Totem Point Management allocated the biggest weight to Analog Devices, Inc. (NASDAQ:ADI), around 13.6% of its 13F portfolio. Harvey Partners is also relatively very bullish on the stock, earmarking 6 percent of its 13F equity portfolio to ADI.

Due to the fact that Analog Devices, Inc. (NASDAQ:ADI) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there was a specific group of money managers that decided to sell off their entire stakes last quarter. It’s worth mentioning that Alex Sacerdote’s Whale Rock Capital Management said goodbye to the largest investment of the 750 funds followed by Insider Monkey, valued at close to $132.2 million in call options. Brandon Haley’s fund, Holocene Advisors, also cut its call options, about $46.3 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Analog Devices, Inc. (NASDAQ:ADI). We will take a look at JD.Com Inc (NASDAQ:JD), Emerson Electric Co. (NYSE:EMR), HCA Healthcare Inc (NYSE:HCA), and Marriott International Inc (NASDAQ:MAR). This group of stocks’ market caps are similar to ADI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JD 54 5279009 9
EMR 37 594019 5
HCA 55 2621149 4
MAR 37 2446310 10
Average 45.75 2735122 7

View table here if you experience formatting issues.

As you can see these stocks had an average of 45.75 hedge funds with bullish positions and the average amount invested in these stocks was $2735 million. That figure was $2518 million in ADI’s case. HCA Healthcare Inc (NYSE:HCA) is the most popular stock in this table. On the other hand Emerson Electric Co. (NYSE:EMR) is the least popular one with only 37 bullish hedge fund positions. Analog Devices, Inc. (NASDAQ:ADI) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on ADI as the stock returned 41.7% in 2019 through December 23rd and outperformed the market by an even larger margin.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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