Did Hedge Funds Make The Right Call On Power Integrations Inc (POWI) ?

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 Power Integrations Inc (NASDAQ:POWI) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Power Integrations Inc (NASDAQ:POWI) a good investment right now? Money managers were in a bullish mood. The number of long hedge fund bets rose by 4 lately. Our calculations also showed that POWI 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). POWI was in 21 hedge funds’ portfolios at the end of March. There were 17 hedge funds in our database with POWI positions at the end of the previous quarter.

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.

Jim Simons of Renaissance Technologies

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to take a glance at the new hedge fund action encompassing Power Integrations Inc (NASDAQ:POWI).

How are hedge funds trading Power Integrations Inc (NASDAQ:POWI)?

Heading into the second quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the previous quarter. By comparison, 6 hedge funds held shares or bullish call options in POWI a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Polar Capital was the largest shareholder of Power Integrations Inc (NASDAQ:POWI), with a stake worth $39.9 million reported as of the end of September. Trailing Polar Capital was Cavalry Asset Management, which amassed a stake valued at $10.1 million. AQR Capital Management, GLG Partners, and Renaissance Technologies 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 Cavalry Asset Management allocated the biggest weight to Power Integrations Inc (NASDAQ:POWI), around 1.11% of its 13F portfolio. Polar Capital is also relatively very bullish on the stock, setting aside 0.43 percent of its 13F equity portfolio to POWI.

As one would reasonably expect, key money managers have been driving this bullishness. Cavalry Asset Management, managed by John Hurley, created the most outsized position in Power Integrations Inc (NASDAQ:POWI). Cavalry Asset Management had $10.1 million invested in the company at the end of the quarter. Louis Navellier’s Navellier & Associates also initiated a $0.4 million position during the quarter. The other funds with new positions in the stock are Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, Mike Vranos’s Ellington, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s now take a look at hedge fund activity in other stocks similar to Power Integrations Inc (NASDAQ:POWI). These stocks are The Gap Inc. (NYSE:GPS), Kirby Corporation (NYSE:KEX), The Brink’s Company (NYSE:BCO), and OneMain Holdings Inc (NYSE:OMF). All of these stocks’ market caps are similar to POWI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $208 million. That figure was $77 million in POWI’s case. OneMain Holdings Inc (NYSE:OMF) is the most popular stock in this table. On the other hand Kirby Corporation (NYSE:KEX) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Power Integrations Inc (NASDAQ:POWI) is even less popular than KEX. Hedge funds clearly dropped the ball on POWI as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on POWI as the stock returned 38.6% since the end of March and outperformed the market by an even larger margin.

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