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

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Lam Research Corporation (NASDAQ:LRCX) and determine whether hedge funds had an edge regarding this stock.

Lam Research Corporation (NASDAQ:LRCX) investors should be aware of an increase in activity from the world’s largest hedge funds of late. LRCX was in 54 hedge funds’ portfolios at the end of March. There were 52 hedge funds in our database with LRCX positions at the end of the previous quarter. Our calculations also showed that LRCX 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ken Fisher - FISHER ASSET MANAGEMENT

Ken Fisher of Fisher Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a gander at the fresh hedge fund action encompassing Lam Research Corporation (NASDAQ:LRCX).

What does smart money think about Lam Research Corporation (NASDAQ:LRCX)?

At the end of the first quarter, a total of 54 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards LRCX over the last 18 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Is LRCX A Good Stock To Buy?

More specifically, AQR Capital Management was the largest shareholder of Lam Research Corporation (NASDAQ:LRCX), with a stake worth $253.5 million reported as of the end of September. Trailing AQR Capital Management was Lansdowne Partners, which amassed a stake valued at $216.3 million. Alkeon Capital Management, Fisher Asset Management, and Whale Rock Capital Management 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 Lansdowne Partners allocated the biggest weight to Lam Research Corporation (NASDAQ:LRCX), around 11.99% of its 13F portfolio. Marlowe Partners is also relatively very bullish on the stock, designating 11.2 percent of its 13F equity portfolio to LRCX.

As aggregate interest increased, specific money managers have been driving this bullishness. Whale Rock Capital Management, managed by Alex Sacerdote, established the largest position in Lam Research Corporation (NASDAQ:LRCX). Whale Rock Capital Management had $120.7 million invested in the company at the end of the quarter. Philippe Laffont’s Coatue Management also initiated a $120.7 million position during the quarter. The other funds with new positions in the stock are Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital, Ryan Caldwell’s Chiron Investment Management, and Javier Velazquez’s Albar Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Lam Research Corporation (NASDAQ:LRCX) but similarly valued. These stocks are Centene Corporation (NYSE:CNC), Baidu, Inc. (NASDAQ:BIDU), Infosys Limited (NYSE:INFY), and Public Storage (NYSE:PSA). This group of stocks’ market valuations resemble LRCX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNC 66 3533228 4
BIDU 49 2234830 -11
INFY 27 970629 2
PSA 27 807200 0
Average 42.25 1886472 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.25 hedge funds with bullish positions and the average amount invested in these stocks was $1886 million. That figure was $1780 million in LRCX’s case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand Infosys Limited (NYSE:INFY) is the least popular one with only 27 bullish hedge fund positions. Lam Research Corporation (NASDAQ:LRCX) 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 LRCX as the stock returned 35.3% 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.