Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Texas Instruments Incorporated (NASDAQ:TXN).
Texas Instruments Incorporated (NASDAQ:TXN) has seen an increase in hedge fund interest recently. TXN was in 52 hedge funds’ portfolios at the end of the third quarter of 2019. There were 43 hedge funds in our database with TXN positions at the end of the previous quarter. Our calculations also showed that TXN 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.
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 let’s take a glance at the recent hedge fund action surrounding Texas Instruments Incorporated (NASDAQ:TXN).
Hedge fund activity in Texas Instruments Incorporated (NASDAQ:TXN)
At the end of the third quarter, a total of 52 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from one quarter earlier. On the other hand, there were a total of 48 hedge funds with a bullish position in TXN a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Texas Instruments Incorporated (NASDAQ:TXN) was held by Generation Investment Management, which reported holding $708.7 million worth of stock at the end of September. It was followed by AQR Capital Management with a $462 million position. Other investors bullish on the company included Diamond Hill Capital, Lansdowne Partners, and Adage Capital Management. In terms of the portfolio weights assigned to each position Cavalry Asset Management allocated the biggest weight to Texas Instruments Incorporated (NASDAQ:TXN), around 6.39% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, setting aside 5 percent of its 13F equity portfolio to TXN.
As aggregate interest increased, some big names have jumped into Texas Instruments Incorporated (NASDAQ:TXN) headfirst. Two Sigma Advisors, managed by John Overdeck and David Siegel, created the biggest position in Texas Instruments Incorporated (NASDAQ:TXN). Two Sigma Advisors had $10.8 million invested in the company at the end of the quarter. Ernest Chow and Jonathan Howe’s Sensato Capital Management also made a $7.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Jeffrey Talpins’s Element Capital Management, Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital, and Dipak Patel’s Alight Capital.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Texas Instruments Incorporated (NASDAQ:TXN) but similarly valued. We will take a look at Philip Morris International Inc. (NYSE:PM), United Technologies Corporation (NYSE:UTX), Netflix, Inc. (NASDAQ:NFLX), and AstraZeneca plc (NYSE:AZN). This group of stocks’ market caps resemble TXN’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 60.25 hedge funds with bullish positions and the average amount invested in these stocks was $5232 million. That figure was $2579 million in TXN’s case. Netflix, Inc. (NASDAQ:NFLX) is the most popular stock in this table. On the other hand AstraZeneca plc (NYSE:AZN) is the least popular one with only 25 bullish hedge fund positions. Texas Instruments Incorporated (NASDAQ:TXN) 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 TXN, though not to the same extent, as the stock returned 39.8% in 2019 (as of 12/23) and outperformed the market.
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.