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Were Hedge Funds Right About Buying Seagate Technology plc (STX)?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Seagate Technology plc (NASDAQ:STX).

Seagate Technology plc (NASDAQ:STX) investors should pay attention to an increase in hedge fund sentiment lately. Our calculations also showed that STX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to go over the key hedge fund action surrounding Seagate Technology plc (NASDAQ:STX).

What have hedge funds been doing with Seagate Technology plc (NASDAQ:STX)?

At the end of the third quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from the second quarter of 2019. By comparison, 27 hedge funds held shares or bullish call options in STX a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

STX_dec2019

More specifically, ValueAct Capital was the largest shareholder of Seagate Technology plc (NASDAQ:STX), with a stake worth $1697.3 million reported as of the end of September. Trailing ValueAct Capital was Renaissance Technologies, which amassed a stake valued at $227.9 million. Two Sigma Advisors, AQR Capital Management, 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 ValueAct Capital allocated the biggest weight to Seagate Technology plc (NASDAQ:STX), around 18.31% of its portfolio. 13D Management is also relatively very bullish on the stock, designating 5.35 percent of its 13F equity portfolio to STX.

As one would reasonably expect, some big names were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most valuable position in Seagate Technology plc (NASDAQ:STX). Arrowstreet Capital had $52.4 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $6.2 million investment in the stock during the quarter. The other funds with brand new STX positions are Peter Muller’s PDT Partners, David Costen Haley’s HBK Investments, and Jeffrey Talpins’s Element Capital Management.

Let’s go over hedge fund activity in other stocks similar to Seagate Technology plc (NASDAQ:STX). These stocks are UDR, Inc. (NYSE:UDR), Banco de Chile (NYSE:BCH), Take-Two Interactive Software, Inc. (NASDAQ:TTWO), and Live Nation Entertainment, Inc. (NYSE:LYV). All of these stocks’ market caps are similar to STX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UDR 21 560389 5
BCH 4 66263 -2
TTWO 57 1596551 -3
LYV 40 1097828 1
Average 30.5 830258 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $830 million. That figure was $2311 million in STX’s case. Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is the most popular stock in this table. On the other hand Banco de Chile (NYSE:BCH) is the least popular one with only 4 bullish hedge fund positions. Seagate Technology plc (NASDAQ:STX) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on STX as the stock returned 10.9% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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