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Were Hedge Funds Right About Piling Into Cisco Systems, Inc. (CSCO)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on December 31st. We at Insider Monkey have made an extensive database of more than 835 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Cisco Systems, Inc. (NASDAQ:CSCO) based on those filings.

Is Cisco Systems, Inc. (NASDAQ:CSCO) a cheap stock to buy now? The smart money is buying. The number of bullish hedge fund bets rose by 3 lately. Our calculations also showed that CSCO 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). CSCO was in 68 hedge funds’ portfolios at the end of December. There were 65 hedge funds in our database with CSCO positions at the end of the previous quarter.

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.

Ken Fisher FISHER ASSET MANAGEMENT

Ken Fisher of Fisher Asset Management

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s view the new hedge fund action encompassing Cisco Systems, Inc. (NASDAQ:CSCO).

Hedge fund activity in Cisco Systems, Inc. (NASDAQ:CSCO)

At the end of the fourth quarter, a total of 68 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the third quarter of 2019. On the other hand, there were a total of 55 hedge funds with a bullish position in CSCO a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in Cisco Systems, Inc. (NASDAQ:CSCO) was held by Fisher Asset Management, which reported holding $1456.4 million worth of stock at the end of September. It was followed by AQR Capital Management with a $578.6 million position. Other investors bullish on the company included Two Sigma Advisors, D E Shaw, and Adage Capital Management. In terms of the portfolio weights assigned to each position Bronson Point Partners allocated the biggest weight to Cisco Systems, Inc. (NASDAQ:CSCO), around 12.47% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, setting aside 5.52 percent of its 13F equity portfolio to CSCO.

With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls’ herd. Bronson Point Partners, managed by Larry Foley and Paul Farrell, assembled the most valuable position in Cisco Systems, Inc. (NASDAQ:CSCO). Bronson Point Partners had $22.2 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $21.1 million position during the quarter. The other funds with brand new CSCO positions are Dmitry Balyasny’s Balyasny Asset Management, Michael Rockefeller and Karl Kroeker’s Woodline Partners, and Bernard Selz’s Selz Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Cisco Systems, Inc. (NASDAQ:CSCO) but similarly valued. We will take a look at Toyota Motor Corporation (NYSE:TM), PepsiCo, Inc. (NASDAQ:PEP), The Boeing Company (NYSE:BA), and Citigroup Inc. (NYSE:C). This group of stocks’ market valuations are similar to CSCO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TM 12 249046 0
PEP 59 3107057 -4
BA 82 2856387 -1
C 98 11733711 -3
Average 62.75 4486550 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 62.75 hedge funds with bullish positions and the average amount invested in these stocks was $4487 million. That figure was $4030 million in CSCO’s case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 12 bullish hedge fund positions. Cisco Systems, Inc. (NASDAQ:CSCO) 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 lost 1.0% in 2020 through April 20th but still beat the market by 11 percentage points. Hedge funds were also right about betting on CSCO, though not to the same extent, as the stock returned -9.8% during the first four months of 2020 (through April 20th) and outperformed the market as well.
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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