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Were Hedge Funds Right About Flocking Into Fortinet Inc (FTNT)?

We at Insider Monkey have gone over 738 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st. In this article, we look at what those funds think of Fortinet Inc (NASDAQ:FTNT) based on that data.

Is Fortinet Inc (NASDAQ:FTNT) ready to rally soon? The best stock pickers are turning bullish. The number of long hedge fund bets went up by 1 in recent months. Our calculations also showed that ftnt isn’t among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

John Overdeck of Two Sigma

Let’s take a look at the recent hedge fund action regarding Fortinet Inc (NASDAQ:FTNT).

How are hedge funds trading Fortinet Inc (NASDAQ:FTNT)?

Heading into the second quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in FTNT over the last 15 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

No of Hedge Funds with FTNT Positions

More specifically, AQR Capital Management was the largest shareholder of Fortinet Inc (NASDAQ:FTNT), with a stake worth $316.8 million reported as of the end of March. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $313.9 million. Arrowstreet Capital, Two Sigma Advisors, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, some big names were leading the bulls’ herd. HBK Investments, managed by David Costen Haley, created the most valuable position in Fortinet Inc (NASDAQ:FTNT). HBK Investments had $7.4 million invested in the company at the end of the quarter. Minhua Zhang’s Weld Capital Management also initiated a $1.6 million position during the quarter. The following funds were also among the new FTNT investors: Benjamin A. Smith’s Laurion Capital Management, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, and Steve Cohen’s Point72 Asset Management.

Let’s also examine hedge fund activity in other stocks similar to Fortinet Inc (NASDAQ:FTNT). These stocks are New Oriental Education & Tech Group Inc. (NYSE:EDU), American Airlines Group Inc (NASDAQ:AAL), Western Midstream Partners, LP (NYSE:WES), and Xylem Inc (NYSE:XYL). All of these stocks’ market caps match FTNT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EDU 28 932754 3
AAL 41 2032858 -4
WES 8 136200 1
XYL 13 520900 -5
Average 22.5 905678 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $906 million. That figure was $1245 million in FTNT’s case. American Airlines Group Inc (NASDAQ:AAL) is the most popular stock in this table. On the other hand Western Midstream Partners, LP (NYSE:WES) is the least popular one with only 8 bullish hedge fund positions. Fortinet Inc (NASDAQ:FTNT) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately FTNT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FTNT were disappointed as the stock returned -9.4% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.

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

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