We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 835 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Mellanox Technologies, Ltd. (NASDAQ:MLNX) in this article.
Mellanox Technologies, Ltd. (NASDAQ:MLNX) was in 39 hedge funds’ portfolios at the end of December. MLNX investors should pay attention to a decrease in hedge fund interest recently. There were 42 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 (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
Matthew Halbower of Pentwater Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a peek at the fresh hedge fund action regarding Mellanox Technologies, Ltd. (NASDAQ:MLNX).
What have hedge funds been doing with Mellanox Technologies, Ltd. (NASDAQ:MLNX)?
At the end of the fourth quarter, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the third quarter of 2019. By comparison, 45 hedge funds held shares or bullish call options in MLNX a year ago. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
More specifically, Alpine Associates was the largest shareholder of Mellanox Technologies, Ltd. (NASDAQ:MLNX), with a stake worth $232.8 million reported as of the end of September. Trailing Alpine Associates was Magnetar Capital, which amassed a stake valued at $172.2 million. Pentwater Capital Management, D E Shaw, and Renaissance Technologies 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 Falcon Edge Capital allocated the biggest weight to Mellanox Technologies, Ltd. (NASDAQ:MLNX), around 12.63% of its 13F portfolio. Alpine Associates is also relatively very bullish on the stock, dishing out 7.41 percent of its 13F equity portfolio to MLNX.
Since Mellanox Technologies, Ltd. (NASDAQ:MLNX) has witnessed a decline in interest from the smart money, logic holds that there was a specific group of fund managers that elected to cut their positions entirely by the end of the third quarter. Intriguingly, Kelly Hampaul’s Everett Capital Advisors dumped the largest stake of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $88.4 million in stock. Ben Levine, Andrew Manuel and Stefan Renold’s fund, LMR Partners, also cut its stock, about $19.7 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 3 funds by the end of the third quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Mellanox Technologies, Ltd. (NASDAQ:MLNX) but similarly valued. We will take a look at ITT Corp (NYSE:ITT), Proofpoint Inc (NASDAQ:PFPT), Morningstar, Inc. (NASDAQ:MORN), and Paylocity Holding Corp (NASDAQ:PCTY). All of these 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 |
|---|---|---|---|
| ITT | 28 | 756797 | 3 |
| PFPT | 35 | 395274 | -10 |
| MORN | 21 | 286273 | -4 |
| PCTY | 26 | 588280 | -4 |
| Average | 27.5 | 506656 | -3.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $507 million. That figure was $1469 million in MLNX’s case. Proofpoint Inc (NASDAQ:PFPT) is the most popular stock in this table. On the other hand Morningstar, Inc. (NASDAQ:MORN) is the least popular one with only 21 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still managed to beat the market by 3.2 percentage points. Hedge funds were also right about betting on MLNX as the stock returned -17.4% so far in Q1 (through March 16th) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
