Did Hedge Funds Make The Right Call On Microchip Technology Incorporated (MCHP) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Microchip Technology Incorporated (NASDAQ:MCHP) and determine whether hedge funds skillfully traded this stock.

Microchip Technology Incorporated (NASDAQ:MCHP) was in 38 hedge funds’ portfolios at the end of the first quarter of 2020. MCHP investors should pay attention to a decrease in enthusiasm from smart money lately. There were 46 hedge funds in our database with MCHP holdings at the end of the previous quarter. Our calculations also showed that MCHP 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).

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 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 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 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.

Louis Bacon Moore of Moore Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind let’s take a glance at the latest hedge fund action surrounding Microchip Technology Incorporated (NASDAQ:MCHP).

Hedge fund activity in Microchip Technology Incorporated (NASDAQ:MCHP)

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MCHP over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Microchip Technology Incorporated (NASDAQ:MCHP) was held by Platinum Asset Management, which reported holding $193.4 million worth of stock at the end of September. It was followed by Point72 Asset Management with a $105.3 million position. Other investors bullish on the company included Alkeon Capital Management, Citadel Investment Group, and D E Shaw. In terms of the portfolio weights assigned to each position Platinum Asset Management allocated the biggest weight to Microchip Technology Incorporated (NASDAQ:MCHP), around 4.88% of its 13F portfolio. Sustainable Insight Capital Management is also relatively very bullish on the stock, designating 4.74 percent of its 13F equity portfolio to MCHP.

Judging by the fact that Microchip Technology Incorporated (NASDAQ:MCHP) has faced falling interest from the entirety of the hedge funds we track, logic holds that there is a sect of hedgies that slashed their entire stakes heading into Q4. It’s worth mentioning that Andrew Weiss’s Weiss Asset Management sold off the largest stake of the 750 funds monitored by Insider Monkey, comprising an estimated $141 million in stock, and Kevin Cottrell and Chris LaSusa’s KCL Capital was right behind this move, as the fund cut about $23.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 8 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Microchip Technology Incorporated (NASDAQ:MCHP) but similarly valued. We will take a look at Telefonica Brasil SA (NYSE:VIV), Canadian Natural Resources Limited (NYSE:CNQ), Yum China Holdings, Inc. (NYSE:YUMC), and Copart, Inc. (NASDAQ:CPRT). This group of stocks’ market caps are similar to MCHP’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $410 million. That figure was $751 million in MCHP’s case. Copart, Inc. (NASDAQ:CPRT) is the most popular stock in this table. On the other hand Telefonica Brasil SA (NYSE:VIV) is the least popular one with only 8 bullish hedge fund positions. Microchip Technology Incorporated (NASDAQ:MCHP) 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 MCHP as the stock returned 56% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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