We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Mellanox Technologies, Ltd. (NASDAQ:MLNX).
Mellanox Technologies, Ltd. (NASDAQ:MLNX) was in 39 hedge funds’ portfolios at the end of June. MLNX has experienced a decrease in support from the world’s most elite money managers of late. There were 41 hedge funds in our database with MLNX holdings at the end of the previous quarter. Our calculations also showed that MLNX isn’t among the 30 most popular stocks among hedge funds (view the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a look at the recent hedge fund action regarding Mellanox Technologies, Ltd. (NASDAQ:MLNX).
Hedge fund activity in Mellanox Technologies, Ltd. (NASDAQ:MLNX)
At the end of the second quarter, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MLNX over the last 16 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Pentwater Capital Management held the most valuable stake in Mellanox Technologies, Ltd. (NASDAQ:MLNX), which was worth $219.8 million at the end of the second quarter. On the second spot was Magnetar Capital which amassed $187.8 million worth of shares. Moreover, Alpine Associates, Renaissance Technologies, and Everett Capital Advisors were also bullish on Mellanox Technologies, Ltd. (NASDAQ:MLNX), allocating a large percentage of their portfolios to this stock.
Since Mellanox Technologies, Ltd. (NASDAQ:MLNX) has experienced bearish sentiment from hedge fund managers, it’s safe to say that there lies a certain “tier” of money managers that slashed their entire stakes by the end of the second quarter. Intriguingly, Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital said goodbye to the biggest investment of all the hedgies monitored by Insider Monkey, totaling close to $31.5 million in call options, and Glenn Russell Dubin’s Highbridge Capital Management was right behind this move, as the fund dropped about $11.8 million worth. These transactions are interesting, as total hedge fund interest was cut by 2 funds by the end of the second quarter.
Let’s now review hedge fund activity in other stocks similar to Mellanox Technologies, Ltd. (NASDAQ:MLNX). We will take a look at Genesee & Wyoming Inc (NYSE:GWR), Watsco Inc (NYSE:WSO), Haemonetics Corporation (NYSE:HAE), and Cree, Inc. (NASDAQ:CREE). This group of stocks’ market caps are similar to MLNX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GWR | 26 | 595964 | 4 |
| WSO | 22 | 171755 | 4 |
| HAE | 23 | 762479 | -1 |
| CREE | 24 | 425587 | 10 |
| Average | 23.75 | 488946 | 4.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $489 million. That figure was $1426 million in MLNX’s case. Genesee & Wyoming Inc (NYSE:GWR) is the most popular stock in this table. On the other hand Watsco Inc (NYSE:WSO) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Mellanox Technologies, Ltd. (NASDAQ:MLNX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MLNX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MLNX were disappointed as the stock returned -1% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market in Q3.
Disclosure: None. This article was originally published at Insider Monkey.
