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Were Hedge Funds Right About Piling Into Analog Devices, Inc. (ADI)?

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 Analog Devices, Inc. (NASDAQ:ADI) and determine whether hedge funds skillfully traded this stock.

Is Analog Devices, Inc. (NASDAQ:ADI) the right investment to pursue these days? Money managers were taking a bearish view. The number of bullish hedge fund bets retreated by 6 in recent months. Our calculations also showed that ADI 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). ADI was in 45 hedge funds’ portfolios at the end of the first quarter of 2020. There were 51 hedge funds in our database with ADI positions at the end of the previous quarter.

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

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital 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. Now we’re going to take a look at the latest hedge fund action encompassing Analog Devices, Inc. (NASDAQ:ADI).

What have hedge funds been doing with Analog Devices, Inc. (NASDAQ:ADI)?

At the end of the first quarter, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ADI over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Cantillon Capital Management held the most valuable stake in Analog Devices, Inc. (NASDAQ:ADI), which was worth $443.1 million at the end of the third quarter. On the second spot was First Pacific Advisors LLC which amassed $351.2 million worth of shares. Generation Investment Management, Alkeon Capital Management, and Lansdowne Partners 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 Totem Point Management allocated the biggest weight to Analog Devices, Inc. (NASDAQ:ADI), around 12.15% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, earmarking 7.56 percent of its 13F equity portfolio to ADI.

Judging by the fact that Analog Devices, Inc. (NASDAQ:ADI) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedge funds that decided to sell off their positions entirely by the end of the first quarter. It’s worth mentioning that Anand Parekh’s Alyeska Investment Group cut the largest stake of all the hedgies monitored by Insider Monkey, comprising an estimated $56.7 million in stock, and Leon Shaulov’s Maplelane Capital was right behind this move, as the fund cut about $16.6 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 6 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks similar to Analog Devices, Inc. (NASDAQ:ADI). These stocks are Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG), Banco Bradesco SA (NYSE:BBD), Barrick Gold Corporation (NYSE:GOLD), and Las Vegas Sands Corp. (NYSE:LVS). This group of stocks’ market caps are similar to ADI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SMFG 10 104520 -1
BBD 15 246087 -3
GOLD 54 1756373 3
LVS 42 1186415 5
Average 30.25 823349 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.25 hedge funds with bullish positions and the average amount invested in these stocks was $823 million. That figure was $1980 million in ADI’s case. Barrick Gold Corporation (NYSE:GOLD) is the most popular stock in this table. On the other hand Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG) is the least popular one with only 10 bullish hedge fund positions. Analog Devices, Inc. (NASDAQ:ADI) 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 ADI as the stock returned 37.5% 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.