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Were Hedge Funds Right About Warming Up To Palo Alto Networks Inc (PANW)?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through November 22nd. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 52% and 49% respectively. Hedge funds’ top 3 stock picks returned 39.1% this year and beat the S&P 500 ETFs by nearly 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Palo Alto Networks Inc (NYSE:PANW).

Is Palo Alto Networks Inc (NYSE:PANW) a buy here? The smart money is getting more optimistic. The number of long hedge fund positions advanced by 2 lately. Our calculations also showed that PANW isn’t among the 30 most popular stocks among hedge funds. PANW was in 47 hedge funds’ portfolios at the end of the third quarter of 2019. There were 45 hedge funds in our database with PANW positions at the end of the previous quarter.

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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.

RENAISSANCE TECHNOLOGIES

Jim Simons of Renaissance Technologies

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the latest hedge fund action regarding Palo Alto Networks Inc (NYSE:PANW).

How have hedgies been trading Palo Alto Networks Inc (NYSE:PANW)?

At Q3’s end, a total of 47 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the previous quarter. By comparison, 46 hedge funds held shares or bullish call options in PANW a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

PANW_nov2019

Among these funds, Renaissance Technologies held the most valuable stake in Palo Alto Networks Inc (NYSE:PANW), which was worth $1192 million at the end of the third quarter. On the second spot was Harvard Management Co which amassed $265.1 million worth of shares. Cadian Capital, Senator Investment Group, and D E Shaw 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 Harvard Management Co allocated the biggest weight to Palo Alto Networks Inc (NYSE:PANW), around 24.69% of its portfolio. Cadian Capital is also relatively very bullish on the stock, dishing out 12.33 percent of its 13F equity portfolio to PANW.

Consequently, specific money managers have been driving this bullishness. Farallon Capital, established the biggest position in Palo Alto Networks Inc (NYSE:PANW). Farallon Capital had $124.3 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $27.2 million investment in the stock during the quarter. The other funds with brand new PANW positions are Ken Griffin’s Citadel Investment Group, Brian Ashford-Russell and Tim Woolley’s Polar Capital, and Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Palo Alto Networks Inc (NYSE:PANW) but similarly valued. We will take a look at Expedia Group, Inc (NASDAQ:EXPE), Fifth Third Bancorp (NASDAQ:FITB), Fox Corporation (NASDAQ:FOX), and Fox Corporation (NASDAQ:FOXA). All of these stocks’ market caps resemble PANW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EXPE 33 2622304 0
FITB 34 1027583 5
FOX 27 849332 -3
FOXA 48 2457821 -12
Average 35.5 1739260 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.5 hedge funds with bullish positions and the average amount invested in these stocks was $1739 million. That figure was $2862 million in PANW’s case. Fox Corporation (NASDAQ:FOXA) is the most popular stock in this table. On the other hand Fox Corporation (NASDAQ:FOX) is the least popular one with only 27 bullish hedge fund positions. Palo Alto Networks Inc (NYSE:PANW) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Hedge funds were also right about betting on PANW as the stock returned 21.1% during the fourth quarter (through 11/22) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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