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Were Hedge Funds Right About NXP Semiconductors NV (NXPI)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards NXP Semiconductors NV (NASDAQ:NXPI) and determine whether hedge funds skillfully traded this stock.

Is NXP Semiconductors NV (NASDAQ:NXPI) a splendid investment right now? The best stock pickers were reducing their bets on the stock. The number of bullish hedge fund bets fell by 28 lately. Our calculations also showed that NXPI 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). NXPI was in 52 hedge funds’ portfolios at the end of the first quarter of 2020. There were 80 hedge funds in our database with NXPI holdings at the end of the previous quarter.

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

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 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. 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

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. Now let’s take a look at the recent hedge fund action encompassing NXP Semiconductors NV (NASDAQ:NXPI).

How are hedge funds trading NXP Semiconductors NV (NASDAQ:NXPI)?

At the end of the first quarter, a total of 52 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -35% from the previous quarter. On the other hand, there were a total of 52 hedge funds with a bullish position in NXPI a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is NXPI A Good Stock To Buy?

More specifically, Point72 Asset Management was the largest shareholder of NXP Semiconductors NV (NASDAQ:NXPI), with a stake worth $182.8 million reported as of the end of September. Trailing Point72 Asset Management was Citadel Investment Group, which amassed a stake valued at $152.4 million. D E Shaw, Arrowstreet Capital, and Southpoint Capital Advisors 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 Proxima Capital Management allocated the biggest weight to NXP Semiconductors NV (NASDAQ:NXPI), around 6.21% of its 13F portfolio. Sessa Capital is also relatively very bullish on the stock, earmarking 5.94 percent of its 13F equity portfolio to NXPI.

Seeing as NXP Semiconductors NV (NASDAQ:NXPI) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of money managers that slashed their positions entirely by the end of the first quarter. Interestingly, Eric W. Mandelblatt and Gaurav Kapadia’s Soroban Capital Partners sold off the biggest stake of the “upper crust” of funds watched by Insider Monkey, worth an estimated $643.3 million in stock. Brandon Haley’s fund, Holocene Advisors, also sold off its stock, about $169.2 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 28 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as NXP Semiconductors NV (NASDAQ:NXPI) but similarly valued. These stocks are Veeva Systems Inc (NYSE:VEEV), SYSCO Corporation (NYSE:SYY), Capital One Financial Corp. (NYSE:COF), and Canon Inc. (NYSE:CAJ). All of these stocks’ market caps are closest to NXPI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VEEV 33 352902 -11
SYY 35 1783679 7
COF 50 1107098 0
CAJ 7 46934 -1
Average 31.25 822653 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $823 million. That figure was $1234 million in NXPI’s case. Capital One Financial Corp. (NYSE:COF) is the most popular stock in this table. On the other hand Canon Inc. (NYSE:CAJ) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks NXP Semiconductors NV (NASDAQ:NXPI) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on NXPI as the stock returned 38% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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