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Were Hedge Funds Right About Warming Up To F5 Networks, Inc. (FFIV)?

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 F5 Networks, Inc. (NASDAQ:FFIV) and determine whether hedge funds had an edge regarding this stock.

Is F5 Networks, Inc. (NASDAQ:FFIV) a worthy investment right now? The smart money was taking an optimistic view. The number of bullish hedge fund bets inched up by 3 in recent months. Our calculations also showed that FFIV 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). FFIV was in 32 hedge funds’ portfolios at the end of March. There were 29 hedge funds in our database with FFIV holdings at the end of the previous quarter.

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 was 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’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.

Clint Carlson of Carlson Capital

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. 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 view the key hedge fund action encompassing F5 Networks, Inc. (NASDAQ:FFIV).

How have hedgies been trading F5 Networks, Inc. (NASDAQ:FFIV)?

At the end of the first quarter, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in FFIV a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

The largest stake in F5 Networks, Inc. (NASDAQ:FFIV) was held by Renaissance Technologies, which reported holding $289.9 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $214.9 million position. Other investors bullish on the company included AQR Capital Management, D E Shaw, and Alyeska Investment Group. In terms of the portfolio weights assigned to each position Alyeska Investment Group allocated the biggest weight to F5 Networks, Inc. (NASDAQ:FFIV), around 1.31% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, setting aside 1.12 percent of its 13F equity portfolio to FFIV.

With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. Point72 Asset Management, managed by Steve Cohen, assembled the most valuable position in F5 Networks, Inc. (NASDAQ:FFIV). Point72 Asset Management had $51.7 million invested in the company at the end of the quarter. Clint Carlson’s Carlson Capital also initiated a $20.2 million position during the quarter. The following funds were also among the new FFIV investors: Paul Marshall and Ian Wace’s Marshall Wace LLP, Greg Eisner’s Engineers Gate Manager, and Mark Coe’s Intrinsic Edge Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as F5 Networks, Inc. (NASDAQ:FFIV) but similarly valued. We will take a look at Wynn Resorts, Limited (NASDAQ:WYNN), Advance Auto Parts, Inc. (NYSE:AAP), Aspen Technology, Inc. (NASDAQ:AZPN), and Regency Centers Corp (NASDAQ:REG). All of these stocks’ market caps are similar to FFIV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WYNN 40 403164 -4
AAP 38 839686 -4
AZPN 20 736673 -17
REG 18 167065 2
Average 29 536647 -5.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $537 million. That figure was $940 million in FFIV’s case. Wynn Resorts, Limited (NASDAQ:WYNN) is the most popular stock in this table. On the other hand Regency Centers Corp (NASDAQ:REG) is the least popular one with only 18 bullish hedge fund positions. F5 Networks, Inc. (NASDAQ:FFIV) 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 FFIV as the stock returned 30.8% 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.