Was The Smart Money Wrong About F5 Networks, Inc. (FFIV)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in F5 Networks, Inc. (NASDAQ:FFIV)? The smart money sentiment can provide an answer to this question.

Is F5 Networks, Inc. (NASDAQ:FFIV) going to take off soon? Hedge funds were becoming hopeful. The number of long hedge fund positions advanced by 7 recently. F5 Networks, Inc. (NASDAQ:FFIV) was in 39 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that FFIV isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s check out the new hedge fund action regarding F5 Networks, Inc. (NASDAQ:FFIV).

How have hedgies been trading F5 Networks, Inc. (NASDAQ:FFIV)?

Heading into the third quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 22% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in FFIV over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is FFIV A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of F5 Networks, Inc. (NASDAQ:FFIV), with a stake worth $437.5 million reported as of the end of June. Trailing Renaissance Technologies was AQR Capital Management, which amassed a stake valued at $102.6 million. D E Shaw, Holocene Advisors, and Arrowstreet Capital 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 Shellback Capital allocated the biggest weight to F5 Networks, Inc. (NASDAQ:FFIV), around 2.66% of its 13F portfolio. Diametric Capital is also relatively very bullish on the stock, setting aside 1.04 percent of its 13F equity portfolio to FFIV.

As industrywide interest jumped, some big names have been driving this bullishness. Holocene Advisors, managed by Brandon Haley, initiated the most valuable position in F5 Networks, Inc. (NASDAQ:FFIV). Holocene Advisors had $83.8 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital also initiated a $25.6 million position during the quarter. The other funds with brand new FFIV positions are George McCabe’s Portolan Capital Management, Donald Sussman’s Paloma Partners, and James Dondero’s Highland Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as F5 Networks, Inc. (NASDAQ:FFIV) but similarly valued. We will take a look at Shaw Communications Inc (NYSE:SJR), CyrusOne Inc (NASDAQ:CONE), Beyond Meat, Inc. (NASDAQ:BYND), Henry Schein, Inc. (NASDAQ:HSIC), Ciena Corporation (NASDAQ:CIEN), Chegg Inc (NYSE:CHGG), and Mylan Inc. (NASDAQ:MYL). All of these stocks’ market caps are similar to FFIV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SJR 13 129866 1
CONE 25 483347 -6
BYND 29 253737 16
HSIC 33 1057007 -2
CIEN 32 369502 1
CHGG 45 1004897 11
MYL 46 1646058 -3
Average 31.9 706345 2.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.9 hedge funds with bullish positions and the average amount invested in these stocks was $706 million. That figure was $1074 million in FFIV’s case. Mylan Inc. (NASDAQ:MYL) is the most popular stock in this table. On the other hand Shaw Communications Inc (NYSE:SJR) is the least popular one with only 13 bullish hedge fund positions. F5 Networks, Inc. (NASDAQ:FFIV) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FFIV is 79.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately FFIV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FFIV were disappointed as the stock returned -4.7% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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