Were Hedge Funds Right About Applied Materials, Inc. (AMAT)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended December 31, so let’s proceed with the discussion of the hedge fund sentiment on Applied Materials, Inc. (NASDAQ:AMAT).

Is Applied Materials, Inc. (NASDAQ:AMAT) a sound investment now? The best stock pickers are in a bullish mood. The number of long hedge fund positions inched up by 17 lately. Our calculations also showed that AMAT isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). AMAT was in 72 hedge funds’ portfolios at the end of December. There were 55 hedge funds in our database with AMAT holdings at the end of the previous quarter.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations We are probably at the peak of the COVID-19 pandemic, so we check out this biotech investor’s coronavirus picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s analyze the new hedge fund action encompassing Applied Materials, Inc. (NASDAQ:AMAT).

What does smart money think about Applied Materials, Inc. (NASDAQ:AMAT)?

Heading into the first quarter of 2020, a total of 72 of the hedge funds tracked by Insider Monkey were long this stock, a change of 31% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AMAT over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, AQR Capital Management was the largest shareholder of Applied Materials, Inc. (NASDAQ:AMAT), with a stake worth $495.4 million reported as of the end of September. Trailing AQR Capital Management was Arrowstreet Capital, which amassed a stake valued at $310.3 million. Matrix Capital Management, Generation Investment Management, and Lansdowne Partners 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 Abrams Bison Investments allocated the biggest weight to Applied Materials, Inc. (NASDAQ:AMAT), around 17.09% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, earmarking 6.86 percent of its 13F equity portfolio to AMAT.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Renaissance Technologies, established the biggest position in Applied Materials, Inc. (NASDAQ:AMAT). Renaissance Technologies had $71.6 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $46.4 million position during the quarter. The other funds with new positions in the stock are Edmond M. Safra’s EMS Capital, Anand Parekh’s Alyeska Investment Group, and Charles Clough’s Clough Capital Partners.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Applied Materials, Inc. (NASDAQ:AMAT) but similarly valued. These stocks are Schlumberger Limited. (NYSE:SLB), Ecolab Inc. (NYSE:ECL), Global Payments Inc (NYSE:GPN), and Deere & Company (NYSE:DE). This group of stocks’ market caps are similar to AMAT’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.25 hedge funds with bullish positions and the average amount invested in these stocks was $2244 million. That figure was $3453 million in AMAT’s case. Global Payments Inc (NYSE:GPN) is the most popular stock in this table. On the other hand Ecolab Inc. (NYSE:ECL) is the least popular one with only 44 bullish hedge fund positions. Compared to these stocks Applied Materials, Inc. (NASDAQ:AMAT) is more popular among hedge funds. 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 lost 1.0% in 2020 through April 20th and still beat the market by 11 percentage points. Unfortunately AMAT wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AMAT were disappointed as the stock returned -16.8% during the three months of 2020 (through April 20th) 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 most of these stocks already outperformed the market in 2020.

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.