Five Semiconductor Stocks Hedge Funds Love

At the heart of our increasingly advanced technological environment are semiconductors. From transportation, communication, entertainment to even national defense, semiconductor devices are ubiquitous  in virtually every facet of our lives. Over the past 12 months the semiconductor industry has posted average gains of 7.8% as compared to the S&P 500’s decline of 1.8%. The industry is far from being stagnated as there is not only demand for new innovative technology products, but also much of the developing world has a lot of catching up to do in terms of getting on the technology bandwagon. We have identified five companies listed in order of their popularity among hedge funds that have great future prospects.

In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8,000 funds in operation at present, Insider Monkey looks at only the aristocrats of this group, around 730 funds. Contrary to popular belief, Insider Monkey’s research revealed that hedge funds underperformed in recent years because of their short positions as well as the huge fees that they charge, not because they are not good at picking stocks on the long side of their portfolios. Hedge funds did in fact manage to outperform the market on the long side of their portfolios. In fact, the 15 most popular small-cap stocks among hedge funds has returned 102% since the end of August 2012, beat the S&P 500 Index by 53 percentage points (see the details here).

#5 NXP Semiconductors NV (NASDAQ:NXPI)

Investors with Long Positions (as of September 30): 59

Aggregate Value of Investors’ Holdings (as of September 30): $3.19 Billion

The stock price of the $21.63 billion semiconductor company recovered most of its October losses last month when the boost on the back of the approval by regulatory authorities in China and U.S of NXP’s $16.7 billion merger with Freescale Semiconductor overshadowed the drop that followed the disappointing third-quarter results. NXP Semiconductors NV (NASDAQ:NXPI)’s shares are up by 10.7% so far this year. During the third trimester, the total number of hedge funds holding the stock slipped by 10. However, the aggregate value of these funds’ holdings appreciated by about 6%, even though the stock lost around 12.6% during this period. Soroban Capital Partners, managed by Eric W. Mandelblatt, more than tripled its stake in NXP Semiconductors NV (NASDAQ:NXPI) during the July-September period to 5.05 million shares.

#4 Altera Corporation (NASDAQ:ALTR)

Investors with Long Positions (as of September 30): 62

Aggregate Value of Investors’ Holdings (as of September 30): $3.71 Billion

While the number of hedge funds backing Altera Corporation (NASDAQ:ALTR) remained unchanged during the third quarter, the aggregate value of their holdings appreciated by about 14%. Earlier this year, Intel has acquired Altera in a $16.7 billion transaction. The driving force behind the acquisition was Intel’s chip manufacturing technology that could provide Altera’s field-programmable gate arrays (FPGA) chips with a great competitive advantage against rival Xilinx. Altera Corporation (NASDAQ:ALTR)’s stock has posted outsized returns of more than 43% so far this year. Mattew Halbower‘s Pentwater Capital is the largest stockholder of Altera within our database holding 13.85 million shares of the company valued at $639.61 million.

#3 Avago Technologies Ltd (NASDAQ:AVGO)

Investors with Long Positions (as of September 30): 66

Aggregate Value of Investors’ Holdings (as of September 30): $4.40 Billion

So far this year the stock price of the Singapore-based $39.62 billion radio frequency chip vendor has surged by more than 38%. During the third trimester the total number of hedge funds long Avago Technologies Ltd (NASDAQ:AVGO) slid by 6 and subsequently the aggregate value of these holdings decreased by 6.7%. With the buyout of chip giant Broadcom this year Avago is even better positioned to service its two major clients Apple and Samsung. The company is set to demonstrate its latest optical transceiver technologies for the next generation data centers and enterprise storage applications that will cater for higher bandwidth demands. Viking Global, led by Andreas Halvorsen, holds about 6.94 million shares of Avago Technologies Ltd (NASDAQ:AVGO).

#2 Broadcom Corporation (NASDAQ:BRCM)

Investors with Long Positions (as of September 30): 67

Aggregate Value of Investors’ Holdings (as of September 30): $6.73 Billion

While Broadcom’s merger with Avago has received the approval from shareholders of both the companies, it is still awaiting a nod from regulators. The deal is expected to close at the end of this year or in early 2016. In its financial results for the third quarter Broadcom Corporation (NASDAQ:BRCM) managed to beat both the top and bottom line estimates. Even though the total number of funds holding shares of Broadcom in their portfolios fell by 12 during the third quarter, the aggregate value of these holdings increased by 25%. Matthew Halbower‘s Pentwater Capital Management hiked its stake in Broadcom Corporation (NASDAQ:BRCM) by 8% to 22.1 million shares.

#1 Micron Technology, Inc. (NASDAQ:MU)

Investors with Long Positions (as of September 30): 71

Aggregate Value of Investors’ Holdings (as of September 30): $1.87 Billion

The $14.72 billion memory chip maker recently agreed to buy the remaining 67% stake in Taiwan’s Inotera Memories for $3.2 billion. The deal is expected to close in the middle of next year. Stifel Nicolaus’ analyst Kevin CAssidy believes that the full ownership of DRAM capacity will enable Micron Technology, Inc. (NASDAQ:MU) to convert DRAM capacity to 3D XPoint, which it is developing with Intel, in the future provided that the demand expectations are met. Lower DRAM prices have wrecked havoc with Micron’s stock price this year as it is down by almost 59% on a year-to-date basis. David Shaw‘s D. E. Shaw holds about 12.41 million shares of Micron Technology, Inc. (NASDAQ:MU).

Disclosure: none