Did Hedge Funds Make The Right Call On Synopsys, Inc. (SNPS) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Synopsys, Inc. (NASDAQ:SNPS) and determine whether hedge funds had an edge regarding this stock.

Is Synopsys, Inc. (NASDAQ:SNPS) a buy here? The smart money was taking a pessimistic view. The number of bullish hedge fund bets were trimmed by 14 lately. Our calculations also showed that SNPS 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). SNPS was in 31 hedge funds’ portfolios at the end of the first quarter of 2020. There were 45 hedge funds in our database with SNPS 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.

Sahm Adrangi of Kerrisdale 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 look at the latest hedge fund action surrounding Synopsys, Inc. (NASDAQ:SNPS).

How are hedge funds trading Synopsys, Inc. (NASDAQ:SNPS)?

At the end of the first quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -31% from the fourth quarter of 2019. On the other hand, there were a total of 31 hedge funds with a bullish position in SNPS 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.

According to Insider Monkey’s hedge fund database, Panayotis Takis Sparaggis’s Alkeon Capital Management has the most valuable position in Synopsys, Inc. (NASDAQ:SNPS), worth close to $307.1 million, corresponding to 1.3% of its total 13F portfolio. On Alkeon Capital Management’s heels is AQR Capital Management, led by Cliff Asness, holding a $83 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other members of the smart money that hold long positions contain Robert Boucai’s Newbrook Capital Advisors, Brian Ashford-Russell and Tim Woolley’s Polar Capital and Sahm Adrangi’s Kerrisdale Capital. In terms of the portfolio weights assigned to each position Newbrook Capital Advisors allocated the biggest weight to Synopsys, Inc. (NASDAQ:SNPS), around 8.49% of its 13F portfolio. Crestwood Capital Management is also relatively very bullish on the stock, dishing out 5.68 percent of its 13F equity portfolio to SNPS.

Judging by the fact that Synopsys, Inc. (NASDAQ:SNPS) has experienced a decline in interest from hedge fund managers, we can see that there was a specific group of funds that elected to cut their full holdings in the first quarter. At the top of the heap, Renaissance Technologies dropped the biggest stake of the “upper crust” of funds followed by Insider Monkey, valued at close to $30.1 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund dropped about $11.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 14 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Synopsys, Inc. (NASDAQ:SNPS) but similarly valued. We will take a look at Twitter Inc (NYSE:TWTR), Ford Motor Company (NYSE:F), PT Telekomunikasi Indonesia (NYSE:TLK), and STMicroelectronics N.V. (NYSE:STM). All of these stocks’ market caps are similar to SNPS’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 $470 million. That figure was $726 million in SNPS’s case. Twitter Inc (NYSE:TWTR) is the most popular stock in this table. On the other hand PT Telekomunikasi Indonesia (NYSE:TLK) is the least popular one with only 7 bullish hedge fund positions. Synopsys, Inc. (NASDAQ:SNPS) 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 SNPS as the stock returned 51.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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