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Were Hedge Funds Right About InterDigital, Inc. (IDCC)?

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. Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of InterDigital, Inc. (NASDAQ:IDCC).

InterDigital, Inc. (NASDAQ:IDCC) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 27 hedge funds’ portfolios at the end of December. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as USANA Health Sciences, Inc. (NYSE:USNA), Dril-Quip, Inc. (NYSE:DRQ), and Colony Credit Real Estate, Inc. (NYSE:CLNC) to gather more data points. Our calculations also showed that IDCC 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).

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.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we’re going to take a glance at the recent hedge fund action surrounding InterDigital, Inc. (NASDAQ:IDCC).

What have hedge funds been doing with InterDigital, Inc. (NASDAQ:IDCC)?

At the end of the fourth quarter, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in IDCC a year ago. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

The largest stake in InterDigital, Inc. (NASDAQ:IDCC) was held by Renaissance Technologies, which reported holding $72.5 million worth of stock at the end of September. It was followed by D E Shaw with a $65.7 million position. Other investors bullish on the company included Shannon River Fund Management, Toronado Partners, and Millennium Management. In terms of the portfolio weights assigned to each position Toronado Partners allocated the biggest weight to InterDigital, Inc. (NASDAQ:IDCC), around 9.45% of its 13F portfolio. Shannon River Fund Management is also relatively very bullish on the stock, designating 7.27 percent of its 13F equity portfolio to IDCC.

Seeing as InterDigital, Inc. (NASDAQ:IDCC) has witnessed a decline in interest from the smart money, it’s easy to see that there were a few money managers who sold off their entire stakes in the third quarter. It’s worth mentioning that Spencer M. Waxman’s Shannon River Fund Management sold off the biggest investment of the 750 funds followed by Insider Monkey, worth about $35.1 million in stock. David Harding’s fund, Winton Capital Management, also said goodbye to its stock, about $1.5 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to InterDigital, Inc. (NASDAQ:IDCC). We will take a look at USANA Health Sciences, Inc. (NYSE:USNA), Dril-Quip, Inc. (NYSE:DRQ), Colony Credit Real Estate, Inc. (NYSE:CLNC), and Sonos, Inc. (NASDAQ:SONO). This group of stocks’ market valuations are similar to IDCC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
USNA 12 196149 -2
DRQ 21 129761 1
CLNC 8 26571 1
SONO 26 196559 -3
Average 16.75 137260 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $137 million. That figure was $300 million in IDCC’s case. Sonos, Inc. (NASDAQ:SONO) is the most popular stock in this table. On the other hand Colony Credit Real Estate, Inc. (NYSE:CLNC) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks InterDigital, Inc. (NASDAQ:IDCC) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but still managed to beat the market by 4.2 percentage points. Hedge funds were also right about betting on IDCC, though not to the same extent, as the stock returned -15.9% in 2020 (through April 6th) and outperformed the market as well.
5 Most Popular Stocks Among Hedge Funds
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.

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