Semiconductor stocks lost close to 5% on Wednesday. Micron Technology, Inc. (NASDAQ:MU) lost 5%, Applied Materials, Inc. (NASDAQ:AMAT) slumped 5.3%, and Intel Corporation (NASDAQ:INTC) declined 2.9%. These three stocks were the most popular semiconductor stocks among hedge funds at the end of 2014 (see the list of hedge funds’ 10 most popular stocks). We also took a look at hedge fund positions in the following five stocks:
Broadcom Corporation (NASDAQ:BRCM)
NXP Semiconductors NV(NASDAQ:NXPI)
Avago Technologies (NASDAQ:AVGO)
Texas Instruments (NASDAQ:TXN)
ASML Holding (NASDAQ:ASML)
Micron Technology, Inc. (NASDAQ:MU) is the most popular semiconductor stock among hedge funds. There were 113 hedge funds with long positions in the stock at the end of the fourth quarter. The total value of their positions was more than $8 billion. Billionaires David Einhorn, Andreas Halvorsen, and Seth Klarman had huge positions in Micron Technology, Inc. (NASDAQ:MU). 15% of David Einhorn’s 13F portfolio was in semiconductor stocks whereas 14% of Klarman’s 13F portfolio was invested in these stocks. Dalton Investments and Morgan Sze’s Azentus Capital Management also placed huge bets on Micron, yet the stock has lost 24% year-to-date.
Applied Materials, Inc. (NASDAQ:AMAT) is the second most popular semiconductor stock among hedge funds. There were 79 hedge funds with long positions of $3.5 billion in the stock. Coatue Management’s Philippe Laffont was one of the biggest holders of the stock. Laffont also had large positions in Micron Technology and Avago. In total, 15% of his 13F portfolio was invested in these three stocks.
Intel Corporation (NASDAQ:INTC) is the third most popular semiconductor stock among hedge funds. The tech giant isn’t actually very popular for a $150 billion stock. There were only 62 hedge funds with long positions of $5.4 billion in the stock. This is less than 4% of its market cap. First Eagle, Fisher Asset Management, and Pzena Investment Management had the largest positions. As you may have noticed, these aren’t hedge funds but institutional investors that historically showed some success in investing in value stocks. Russell Hawkins’ Hawkins Capital allocated 16.5% of its 13F portfolio to Intel. Time will tell whether Intel Corporation (NASDAQ:INTC) is a value investment or a value trap.
Broadcom Corporation (NASDAQ:BRCM) is the fourth most popular stock in our list. 61 hedge fund had nearly $2.3 billion invested in the stock at the end of the fourth quarter. Billionaire Andreas Halvorsen was the most noteworthy investor of the $27 billion company. Halvorsen also had large positions in Micron Technology and NXP Semiconductors NV(NASDAQ:NXPI). Michael Price and Amos Meron’s Empyrean Capital had a large bet on Broadcom Corporation (NASDAQ:BRCM) as well. The fund allocated nearly 7% of its 13F portfolio to Broadcom and more than 4% of its portfolio to Applied Materials, Inc. (NASDAQ:AMAT).
The last stock in our list is NXP Semiconductors NV(NASDAQ:NXPI). 58 hedge funds had nearly $2.5 billion invested in the stock at the end of 2014. This is a large number for a $26 billion company. Despite Wednesday’s 3.7% decline, NXP Semiconductors NV(NASDAQ:NXPI) is still up more than 30% year-to-date. Billionaires Andreas Halvorsen, Jamie Dinan, and David Tepper are the three largest hedge fund holders of the stock.
Overall, our research has shown that hedge funds’ large-cap stock picks underperformed the market by an average of 7 basis points per month between 1999 and 2012 (see the details). However, since large-cap stocks are relatively less risky, their risk-adjusted returns are slightly better than the market. This doesn’t mean that investors should follow hedge funds’ large-cap picks like Micron and Applied Materials. On the contrary our research has shown that their 15 most popular small-cap picks outperformed the market by nearly a percentage point a month. Investors could have outperformed the market by double digits if they paid attention to their small-cap picks. We have also been sharing the list of these stocks in our newsletter since the end of August 2012 and our strategy has returned 134% cumulatively since then (through March 11, 2015), outperforming the market by nearly 80 percentage points.
Micron is one of the most popular stocks among hedge funds and there were several hedge funds betting large percentages of their 13F portfolios on the stock. Semiconductor stocks excluding Micron were flat year-to-date, so hedge funds probably lost around $2 billion cumulatively since the end of last year because of their concentrated Micron bets. We think investors should stay away from large-cap stocks if their goal is to beat the market. If hedge funds can’t beat the market by investing in large-cap stocks, most investors can’t either.