Did Hedge Funds Drop The Ball On MKS Instruments, Inc. (MKSI) ?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the second quarter and hedging or reducing many of their long positions. Some fund managers like this one are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding MKS Instruments, Inc. (NASDAQ:MKSI).

MKS Instruments, Inc. (NASDAQ:MKSI) investors should be aware of a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that MKSI isn’t among the 30 most popular stocks among hedge funds (view the video below).

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a peek at the latest hedge fund action encompassing MKS Instruments, Inc. (NASDAQ:MKSI).

Hedge fund activity in MKS Instruments, Inc. (NASDAQ:MKSI)

At Q2’s end, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the first quarter of 2019. On the other hand, there were a total of 28 hedge funds with a bullish position in MKSI a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of MKS Instruments, Inc. (NASDAQ:MKSI), with a stake worth $124.4 million reported as of the end of March. Trailing Renaissance Technologies was Royce & Associates, which amassed a stake valued at $97 million. Fisher Asset Management, AQR Capital Management, and Point72 Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

Because MKS Instruments, Inc. (NASDAQ:MKSI) has faced falling interest from the aggregate hedge fund industry, it’s safe to say that there exists a select few fund managers that slashed their full holdings last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the largest position of the 750 funds followed by Insider Monkey, comprising an estimated $13.4 million in stock. Ian Simm’s fund, Impax Asset Management, also dropped its stock, about $3.5 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 3 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as MKS Instruments, Inc. (NASDAQ:MKSI) but similarly valued. We will take a look at Gold Fields Limited (NYSE:GFI), J2 Global Inc (NASDAQ:JCOM), Eastgroup Properties Inc (NYSE:EGP), and Alcoa Corporation (NYSE:AA). This group of stocks’ market valuations match MKSI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $254 million. That figure was $402 million in MKSI’s case. Alcoa Corporation (NYSE:AA) is the most popular stock in this table. On the other hand Eastgroup Properties Inc (NYSE:EGP) is the least popular one with only 12 bullish hedge fund positions. MKS Instruments, Inc. (NASDAQ:MKSI) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on MKSI as the stock returned 18.8% during the same time frame and outperformed the market by an even larger margin.

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