Did Hedge Funds Make The Right Call On Teradyne, Inc. (TER) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Teradyne, Inc. (NYSE:TER) and determine whether the smart money was really smart about this stock.

Teradyne, Inc. (NYSE:TER) has experienced a decrease in enthusiasm from smart money in recent months. Our calculations also showed that TER 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.

Andrew Sandler of Sandler 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. Now we’re going to take a peek at the fresh hedge fund action regarding Teradyne, Inc. (NYSE:TER).

How have hedgies been trading Teradyne, Inc. (NYSE:TER)?

At Q1’s end, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the fourth quarter of 2019. By comparison, 24 hedge funds held shares or bullish call options in TER a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Teradyne, Inc. (NYSE:TER), with a stake worth $316.4 million reported as of the end of September. Trailing Renaissance Technologies was Alkeon Capital Management, which amassed a stake valued at $160.5 million. Arrowstreet Capital, Two Sigma Advisors, and D E Shaw 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 L2 Asset Management allocated the biggest weight to Teradyne, Inc. (NYSE:TER), around 2.79% of its 13F portfolio. Lyon Street Capital is also relatively very bullish on the stock, designating 1.29 percent of its 13F equity portfolio to TER.

Because Teradyne, Inc. (NYSE:TER) has experienced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of fund managers that decided to sell off their full holdings in the first quarter. At the top of the heap, Michael Rockefeller and KarláKroeker’s Woodline Partners sold off the largest investment of the 750 funds monitored by Insider Monkey, worth an estimated $29.5 million in stock. Andrew Sandler’s fund, Sandler Capital Management, also dumped its stock, about $11.2 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 5 funds in the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Teradyne, Inc. (NYSE:TER) but similarly valued. We will take a look at ONEOK, Inc. (NYSE:OKE), Medical Properties Trust, Inc. (NYSE:MPW), Fair Isaac Corporation (NYSE:FICO), and Elanco Animal Health Incorporated (NYSE:ELAN). This group of stocks’ market values match TER’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $467 million. That figure was $842 million in TER’s case. Fair Isaac Corporation (NYSE:FICO) is the most popular stock in this table. On the other hand Medical Properties Trust, Inc. (NYSE:MPW) is the least popular one with only 16 bullish hedge fund positions. Teradyne, Inc. (NYSE:TER) 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 TER as the stock returned 56.3% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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