Teradyne, Inc. (TER) Beats , Guides High On Strength Of Wireless Test Orders, Shares Jump

Expected weakness in Teradyne, Inc. (NYSE:TER)‘s semiconductor test orders amid an industry slump was more than offset by strength in the company’s wireless test orders, as it posted a revenue and earnings beat for the second quarter in the after-hours yesterday, in addition to providing strong third quarter guidance. Shares have gained 6% today on the results, which consisted of Teradyne earning $0.53 per share on a non-GAAP basis on revenue of $513 million in the second quarter. Analysts were expecting $0.45 in earnings per share on $487.60 million in revenue. The company’s third quarter guidance was also strong, with analysts’ estimates for the period falling on the lower end of Teradyne’s own guidance. While semiconductor testing was responsible for 78% of the company’s revenue in the last quarter, its bookings for that segment decline slightly year-over-year, while the bookings for its wireless test soared by over 200%, as the segment is poised to pull in a bigger chunk of the company’s revenues in the future. Gross margins also improved to 58.3%, up by more than two percentage points quarter-over-quarter, and three percentage points year-over-year.

board, chip, semiconductor

The improved results coincide with bullishness towards the company among the smart money tracked by Insider Monkey. Heading into the second quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish in this stock, an increase of four funds from the previous quarter. While their total holdings did decline by 5.7% to $578 million, the stock depreciated by 4.7% during the same time, accounting for much of the dip, although collectively, we can see funds pulled a small amount of money out of the stock. Since the end of the quarter, the stock has made back its losses from the first quarter.

Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 123% over the ensuing 34 months, outperforming the S&P 500 Index by nearly 67 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

Insider transactions can also provide us with some valuable insight as we look to uncover stocks with strong potential. At Teradyne, Inc. (NYSE:TER) there have not been any insider purchases this year, while there have been a number of sales, chiefly by Director Michael Bradley, who’s sold about 35,000 shares this year.

With all of this in mind, we’re going to take a glance at the fresh smart money action surrounding Teradyne, Inc. (NYSE:TER).

How are hedge funds trading Teradyne, Inc. (NYSE:TER)?

Of the funds tracked by Insider Monkey, Glenview Capital, managed by Larry Robbins, holds the number one position in Teradyne, Inc. (NYSE:TER), having a $245.5 million position in the stock, comprising 1.1% of its 13F portfolio. The second-most bullish hedge fund manager is Chuck Royce of Royce & Associates, with a $114.1 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Other hedgies that hold long positions include Joel Greenblatt‘s Gotham Asset Management, Panayotis Takis Sparaggis’ Alkeon Capital Management, and Thomas E. Claugus’ GMT Capital. Gotham Asset Management and GMT Capital ranked as the two funds with the largest new positions, while Ken Hahn’s Quantec Asset Management sold off the largest position, of just over 450,000 shares.

Given the growing diversification of its business, particularly its charge into wireless testing, which should provide considerable further growth potential, along with generally bullish hedge fund sentiment, we recommend a long position in Teradyne at this time.

Disclosure: None