Did Hedge Funds Make The Right Call On Motorola Solutions Inc (MSI) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Motorola Solutions Inc (NYSE:MSI) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Motorola Solutions Inc (NYSE:MSI) going to take off soon? Prominent investors were becoming less confident. The number of bullish hedge fund bets dropped by 7 recently. Our calculations also showed that MSI 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 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.

Phill Gross of Adage Capital Management

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. Keeping this in mind let’s take a look at the new hedge fund action surrounding Motorola Solutions Inc (NYSE:MSI).

What have hedge funds been doing with Motorola Solutions Inc (NYSE:MSI)?

Heading into the second quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the fourth quarter of 2019. By comparison, 29 hedge funds held shares or bullish call options in MSI a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Among these funds, Adage Capital Management held the most valuable stake in Motorola Solutions Inc (NYSE:MSI), which was worth $53.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $49.3 million worth of shares. D E Shaw, Millennium Management, and Park West Asset Management 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 Park West Asset Management allocated the biggest weight to Motorola Solutions Inc (NYSE:MSI), around 1.8% of its 13F portfolio. RiverPark Advisors is also relatively very bullish on the stock, dishing out 1.47 percent of its 13F equity portfolio to MSI.

Judging by the fact that Motorola Solutions Inc (NYSE:MSI) has faced declining sentiment from hedge fund managers, we can see that there exists a select few funds that elected to cut their positions entirely by the end of the first quarter. Intriguingly, Robert Boucai’s Newbrook Capital Advisors said goodbye to the biggest position of the 750 funds watched by Insider Monkey, worth about $64.3 million in stock. Brandon Haley’s fund, Holocene Advisors, also sold off its stock, about $47.4 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 7 funds by the end of the first quarter.

Let’s check out hedge fund activity in other stocks similar to Motorola Solutions Inc (NYSE:MSI). We will take a look at Paychex, Inc. (NASDAQ:PAYX), O’Reilly Automotive Inc (NASDAQ:ORLY), KLA Corporation (NASDAQ:KLAC), and Spotify Technology S.A. (NYSE:SPOT). This group of stocks’ market caps are closest to MSI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.75 hedge funds with bullish positions and the average amount invested in these stocks was $1159 million. That figure was $309 million in MSI’s case. O’Reilly Automotive Inc (NASDAQ:ORLY) is the most popular stock in this table. On the other hand KLA Corporation (NASDAQ:KLAC) is the least popular one with only 26 bullish hedge fund positions. Motorola Solutions Inc (NYSE:MSI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 and surpassed the market by 15.5 percentage points. Unfortunately MSI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MSI investors were disappointed as the stock returned 5.9% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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