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Were Hedge Funds Right About MKS Instruments, Inc. (MKSI)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtMKS Instruments, Inc. (NASDAQ:MKSI) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is MKS Instruments, Inc. (NASDAQ:MKSI) going to take off soon? The smart money was turning less bullish. The number of bullish hedge fund positions decreased by 1 lately. Our calculations also showed that MKSI isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Andrew Sandler of Sandler Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to take a look at the fresh hedge fund action encompassing MKS Instruments, Inc. (NASDAQ:MKSI).

What have hedge funds been doing with MKS Instruments, Inc. (NASDAQ:MKSI)?

Heading into the second quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the fourth quarter of 2019. On the other hand, there were a total of 22 hedge funds with a bullish position in MKSI a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Chuck Royce’s Royce & Associates has the most valuable position in MKS Instruments, Inc. (NASDAQ:MKSI), worth close to $83.7 million, amounting to 1.1% of its total 13F portfolio. On Royce & Associates’s heels is Steve Cohen of Point72 Asset Management, with a $55.5 million position; 0.5% of its 13F portfolio is allocated to the company. Some other professional money managers with similar optimism contain Ken Fisher’s Fisher Asset Management, Tim Curro’s Value Holdings LP and Renaissance Technologies. In terms of the portfolio weights assigned to each position Value Holdings LP allocated the biggest weight to MKS Instruments, Inc. (NASDAQ:MKSI), around 12.85% of its 13F portfolio. BeaconLight Capital is also relatively very bullish on the stock, dishing out 1.64 percent of its 13F equity portfolio to MKSI.

Since MKS Instruments, Inc. (NASDAQ:MKSI) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there exists a select few money managers who were dropping their full holdings heading into Q4. Intriguingly, Jerry Kochanski’s Shelter Haven Capital Management sold off the largest position of the 750 funds followed by Insider Monkey, comprising an estimated $36.8 million in stock, and Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital was right behind this move, as the fund dumped about $10.7 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 1 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to MKS Instruments, Inc. (NASDAQ:MKSI). These stocks are The Boston Beer Company Inc (NYSE:SAM), Berry Global Group Inc (NYSE:BERY), PLDT Inc. (NYSE:PHI), and IDACORP Inc (NYSE:IDA). This group of stocks’ market valuations are closest to MKSI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SAM 24 557916 -2
BERY 34 1206553 -13
PHI 7 74090 0
IDA 24 282100 0
Average 22.25 530165 -3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $530 million. That figure was $296 million in MKSI’s case. Berry Global Group Inc (NYSE:BERY) is the most popular stock in this table. On the other hand PLDT Inc. (NYSE:PHI) is the least popular one with only 7 bullish hedge fund positions. MKS Instruments, Inc. (NASDAQ:MKSI) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on MKSI as the stock returned 39.3% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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