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 Arista Networks Inc (NYSE:ANET) and determine whether hedge funds had an edge regarding this stock.
Arista Networks Inc (NYSE:ANET) has experienced an increase in activity from the world’s largest hedge funds lately. Arista Networks Inc (NYSE:ANET) was in 33 hedge funds’ portfolios at the end of June. The all time high for this statistics is 29. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ANET isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Jim Simons of Renaissance Technologies
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s take a gander at the key hedge fund action encompassing Arista Networks Inc (NYSE:ANET).
Hedge fund activity in Arista Networks Inc (NYSE:ANET)
At Q2’s end, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38% from the first quarter of 2020. By comparison, 28 hedge funds held shares or bullish call options in ANET a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Arista Networks Inc (NYSE:ANET), with a stake worth $287 million reported as of the end of September. Trailing Renaissance Technologies was Two Sigma Advisors, which amassed a stake valued at $73.5 million. Citadel Investment Group, Arrowstreet Capital, and Citadel Investment Group 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 Tenzing Global Investors allocated the biggest weight to Arista Networks Inc (NYSE:ANET), around 5.41% of its 13F portfolio. TwinBeech Capital is also relatively very bullish on the stock, dishing out 1.01 percent of its 13F equity portfolio to ANET.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the biggest position in Arista Networks Inc (NYSE:ANET). Arrowstreet Capital had $25.7 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $6.2 million investment in the stock during the quarter. The other funds with brand new ANET positions are Jinghua Yan’s TwinBeech Capital, Qing Li’s Sciencast Management, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.
Let’s now review hedge fund activity in other stocks similar to Arista Networks Inc (NYSE:ANET). We will take a look at Baker Hughes Company (NYSE:BKR), Agnico Eagle Mines Limited (NYSE:AEM), ORIX Corporation (NYSE:IX), Trip.com Group Limited (NASDAQ:TCOM), Invitation Homes Inc. (NYSE:INVH), Check Point Software Technologies Ltd. (NASDAQ:CHKP), and Discover Financial Services (NYSE:DFS). This group of stocks’ market valuations resemble ANET’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BKR | 27 | 403640 | -3 |
| AEM | 30 | 594031 | 5 |
| IX | 4 | 3765 | 0 |
| TCOM | 29 | 1235313 | -2 |
| INVH | 33 | 694166 | 6 |
| CHKP | 28 | 725079 | -1 |
| DFS | 44 | 740724 | 4 |
| Average | 27.9 | 628103 | 1.3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.9 hedge funds with bullish positions and the average amount invested in these stocks was $628 million. That figure was $510 million in ANET’s case. Discover Financial Services (NYSE:DFS) is the most popular stock in this table. On the other hand ORIX Corporation (NYSE:IX) is the least popular one with only 4 bullish hedge fund positions. Arista Networks Inc (NYSE:ANET) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ANET is 76.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately ANET wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ANET were disappointed as the stock returned 6.4% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.
