Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Mellanox Technologies, Ltd. (NASDAQ:MLNX) to find out whether it was one of their high conviction long-term ideas.
Hedge fund interest in Mellanox Technologies, Ltd. (NASDAQ:MLNX) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Park Hotels & Resorts Inc. (NYSE:PK), EnCana Corporation (NYSE:ECA), and EPR Properties (NYSE:EPR) to gather more data points. Our calculations also showed that MLNX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the latest hedge fund action surrounding Mellanox Technologies, Ltd. (NASDAQ:MLNX).
What does smart money think about Mellanox Technologies, Ltd. (NASDAQ:MLNX)?
At the end of the third quarter, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 32 hedge funds with a bullish position in MLNX a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Alpine Associates, managed by Robert Emil Zoellner, holds the number one position in Mellanox Technologies, Ltd. (NASDAQ:MLNX). Alpine Associates has a $219.1 million position in the stock, comprising 7.2% of its 13F portfolio. The second largest stake is held by Pentwater Capital Management, led by Matthew Halbower, holding a $186.1 million position; 2.9% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that are bullish comprise Carl Tiedemann and Michael Tiedemann’s TIG Advisors, Alec Litowitz and Ross Laser’s Magnetar Capital and Renaissance Technologies. In terms of the portfolio weights assigned to each position Everett Capital Advisors allocated the biggest weight to Mellanox Technologies, Ltd. (NASDAQ:MLNX), around 14.3% of its portfolio. Twin Capital Management is also relatively very bullish on the stock, earmarking 9.32 percent of its 13F equity portfolio to MLNX.
Seeing as Mellanox Technologies, Ltd. (NASDAQ:MLNX) has witnessed falling interest from hedge fund managers, logic holds that there lies a certain “tier” of funds that elected to cut their entire stakes by the end of the third quarter. It’s worth mentioning that Nick Niell’s Arrowgrass Capital Partners sold off the largest position of the “upper crust” of funds tracked by Insider Monkey, valued at about $55.9 million in stock, and Clint Carlson’s Carlson Capital was right behind this move, as the fund sold off about $25.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks similar to Mellanox Technologies, Ltd. (NASDAQ:MLNX). These stocks are Park Hotels & Resorts Inc. (NYSE:PK), EnCana Corporation (NYSE:ECA), EPR Properties (NYSE:EPR), and Vipshop Holdings Limited (NYSE:VIPS). 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 |
|---|---|---|---|
| PK | 19 | 378136 | -6 |
| ECA | 25 | 262404 | -7 |
| EPR | 18 | 201024 | -2 |
| VIPS | 22 | 244059 | 5 |
| Average | 21 | 271406 | -2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $271 million. That figure was $1507 million in MLNX’s case. EnCana Corporation (NYSE:ECA) is the most popular stock in this table. On the other hand EPR Properties (NYSE:EPR) is the least popular one with only 18 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 4.8% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
