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Were Hedge Funds Right About Lam Research Corporation (LRCX)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not Lam Research Corporation (NASDAQ:LRCX) makes for a good investment right now.

Lam Research Corporation (NASDAQ:LRCX) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 52 hedge funds’ portfolios at the end of the fourth quarter of 2019. 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 The Progressive Corporation (NYSE:PGR), BCE Inc. (NYSE:BCE), and Ross Stores, Inc. (NASDAQ:ROST) to gather more data points. Our calculations also showed that LRCX 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).

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 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.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

With all of this in mind let’s take a peek at the new hedge fund action surrounding Lam Research Corporation (NASDAQ:LRCX).

How are hedge funds trading Lam Research Corporation (NASDAQ:LRCX)?

At the end of the fourth quarter, a total of 52 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards LRCX over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Lam Research Corporation (NASDAQ:LRCX) was held by AQR Capital Management, which reported holding $540.6 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $350.4 million position. Other investors bullish on the company included Two Sigma Advisors, Lansdowne Partners, and GLG Partners. In terms of the portfolio weights assigned to each position Marlowe Partners allocated the biggest weight to Lam Research Corporation (NASDAQ:LRCX), around 11.06% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, dishing out 6.13 percent of its 13F equity portfolio to LRCX.

Due to the fact that Lam Research Corporation (NASDAQ:LRCX) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of fund managers who were dropping their positions entirely in the third quarter. Interestingly, Renaissance Technologies dumped the biggest stake of all the hedgies monitored by Insider Monkey, comprising about $106.9 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also dumped its stock, about $21.9 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Lam Research Corporation (NASDAQ:LRCX). These stocks are The Progressive Corporation (NYSE:PGR), BCE Inc. (NYSE:BCE), Ross Stores, Inc. (NASDAQ:ROST), and Ferrari N.V. (NYSE:RACE). This group of stocks’ market values match LRCX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PGR 48 1782118 -5
BCE 19 219572 5
ROST 48 1029100 4
RACE 36 2003827 2
Average 37.75 1258654 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.75 hedge funds with bullish positions and the average amount invested in these stocks was $1259 million. That figure was $2626 million in LRCX’s case. The Progressive Corporation (NYSE:PGR) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Lam Research Corporation (NASDAQ:LRCX) 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 gained 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately LRCX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LRCX were disappointed as the stock returned -19.1% during the four months of 2020 (through May 1st) 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.
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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