It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds’ favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like Cadence Design Systems Inc (NASDAQ:CDNS) and compare its performance against hedge funds’ favorite stocks.
Is Cadence Design Systems Inc (NASDAQ:CDNS) a buy here? Money managers are becoming hopeful. The number of bullish hedge fund positions went up by 5 recently. Our calculations also showed that CDNS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). CDNS was in 33 hedge funds’ portfolios at the end of the third quarter of 2019. There were 28 hedge funds in our database with CDNS positions at the end of the previous quarter.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a look at the latest hedge fund action regarding Cadence Design Systems Inc (NASDAQ:CDNS).
Hedge fund activity in Cadence Design Systems Inc (NASDAQ:CDNS)
Heading into the fourth quarter of 2019, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CDNS over the last 17 quarters. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, AQR Capital Management, managed by Cliff Asness, holds the biggest position in Cadence Design Systems Inc (NASDAQ:CDNS). AQR Capital Management has a $347.9 million position in the stock, comprising 0.4% of its 13F portfolio. The second largest stake is held by Panayotis Takis Sparaggis of Alkeon Capital Management, with a $340.4 million position; 1.2% of its 13F portfolio is allocated to the company. Other peers with similar optimism comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Noam Gottesman’s GLG Partners and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Sensato Capital Management allocated the biggest weight to Cadence Design Systems Inc (NASDAQ:CDNS), around 4.06% of its 13F portfolio. Mondrian Capital is also relatively very bullish on the stock, designating 1.91 percent of its 13F equity portfolio to CDNS.
Now, specific money managers were breaking ground themselves. Tairen Capital, managed by Larry Chen and Terry Zhang, created the biggest position in Cadence Design Systems Inc (NASDAQ:CDNS). Tairen Capital had $10.8 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also initiated a $4.2 million position during the quarter. The following funds were also among the new CDNS investors: Matthew Tewksbury’s Stevens Capital Management, Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors, and Minhua Zhang’s Weld Capital Management.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Cadence Design Systems Inc (NASDAQ:CDNS) but similarly valued. These stocks are Fortis Inc. (NYSE:FTS), MSCI Inc (NYSE:MSCI), Hess Corporation (NYSE:HES), and Copart, Inc. (NASDAQ:CPRT). This group of stocks’ market valuations resemble CDNS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FTS | 13 | 561241 | 1 |
| MSCI | 37 | 643687 | 1 |
| HES | 36 | 921996 | 1 |
| CPRT | 36 | 580287 | 6 |
| Average | 30.5 | 676803 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $677 million. That figure was $1580 million in CDNS’s case. MSCI Inc (NYSE:MSCI) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 13 bullish hedge fund positions. Cadence Design Systems Inc (NASDAQ:CDNS) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on CDNS as the stock returned 61.3% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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.
