The market has been volatile in the fourth quarter as the Federal Reserve continued its rate hikes to normalize the interest rates. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, and the funds’ movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of Fortinet Inc (NASDAQ:FTNT) and find out how it is affected by hedge funds’ moves.
Is Fortinet Inc (NASDAQ:FTNT) undervalued? The smart money is taking an optimistic view. The number of bullish hedge fund positions inched up by 5 recently. Our calculations also showed that FTNT isn’t among the 30 most popular stocks among hedge funds. FTNT was in 33 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 28 hedge funds in our database with FTNT positions at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 32 percentage points since May 2014 through March 12, 2019 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
We’re going to review the key hedge fund action encompassing Fortinet Inc (NASDAQ:FTNT).
How are hedge funds trading Fortinet Inc (NASDAQ:FTNT)?
At the end of the fourth quarter, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in FTNT over the last 14 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AQR Capital Management was the largest shareholder of Fortinet Inc (NASDAQ:FTNT), with a stake worth $197.6 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $188.5 million. Two Sigma Advisors, Millennium Management, and Arrowstreet Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Now, key hedge funds were breaking ground themselves. Adage Capital Management, managed by Phill Gross and Robert Atchinson, assembled the largest position in Fortinet Inc (NASDAQ:FTNT). Adage Capital Management had $11.8 million invested in the company at the end of the quarter. Matthew Tewksbury’s Stevens Capital Management also made a $3.2 million investment in the stock during the quarter. The following funds were also among the new FTNT investors: Mario Gabelli’s GAMCO Investors, Benjamin A. Smith’s Laurion Capital Management, and Phil Frohlich’s Prescott Group Capital Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Fortinet Inc (NASDAQ:FTNT) but similarly valued. We will take a look at Chipotle Mexican Grill, Inc. (NYSE:CMG), Hess Corporation (NYSE:HES), Xylem Inc (NYSE:XYL), and Cna Financial Corporation (NYSE:CNA). This group of stocks’ market valuations are similar to FTNT’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CMG | 38 | 2036077 | 5 |
| HES | 36 | 1321563 | -1 |
| XYL | 18 | 545153 | -2 |
| CNA | 13 | 92731 | -2 |
| Average | 26.25 | 998881 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $999 million. That figure was $907 million in FTNT’s case. Chipotle Mexican Grill, Inc. (NYSE:CMG) is the most popular stock in this table. On the other hand Cna Financial Corporation (NYSE:CNA) is the least popular one with only 13 bullish hedge fund positions. Fortinet Inc (NASDAQ:FTNT) is not the most popular stock in this group but hedge fund interest is still above average. 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on FTNT, though not to the same extent, as the stock returned 18.2% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
