Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Palo Alto Networks Inc (NYSE:PANW).
Palo Alto Networks Inc (NYSE:PANW) was in 47 hedge funds’ portfolios at the end of the third quarter of 2019. PANW investors should be aware of an increase in support from the world’s most elite money managers in recent months. There were 45 hedge funds in our database with PANW holdings at the end of the previous quarter. Our calculations also showed that PANW isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind let’s go over the fresh hedge fund action regarding Palo Alto Networks Inc (NYSE:PANW).
How have hedgies been trading Palo Alto Networks Inc (NYSE:PANW)?
Heading into the fourth quarter of 2019, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the previous quarter. By comparison, 46 hedge funds held shares or bullish call options in PANW a year ago. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in Palo Alto Networks Inc (NYSE:PANW) was held by Renaissance Technologies, which reported holding $1192 million worth of stock at the end of September. It was followed by Harvard Management Co with a $265.1 million position. Other investors bullish on the company included Cadian Capital, Senator Investment Group, and D E Shaw. In terms of the portfolio weights assigned to each position Harvard Management Co allocated the biggest weight to Palo Alto Networks Inc (NYSE:PANW), around 24.69% of its 13F portfolio. Cadian Capital is also relatively very bullish on the stock, setting aside 12.33 percent of its 13F equity portfolio to PANW.
Consequently, specific money managers were breaking ground themselves. Farallon Capital, initiated the most valuable position in Palo Alto Networks Inc (NYSE:PANW). Farallon Capital had $124.3 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $27.2 million position during the quarter. The other funds with brand new PANW positions are Ken Griffin’s Citadel Investment Group, Brian Ashford-Russell and Tim Woolley’s Polar Capital, and Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Palo Alto Networks Inc (NYSE:PANW) but similarly valued. These stocks are Expedia Inc (NASDAQ:EXPE), Fifth Third Bancorp (NASDAQ:FITB), Twenty-First Century Fox Inc (NASDAQ:FOX), and Twenty-First Century Fox Inc (NASDAQ:FOXA). All of these stocks’ market caps are closest to PANW’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EXPE | 33 | 2622304 | 0 |
| FITB | 34 | 1027583 | 5 |
| FOX | 27 | 849332 | -3 |
| FOXA | 48 | 2457821 | -12 |
| Average | 35.5 | 1739260 | -2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.5 hedge funds with bullish positions and the average amount invested in these stocks was $1739 million. That figure was $2862 million in PANW’s case. Twenty-First Century Fox Inc (NASDAQ:FOXA) is the most popular stock in this table. On the other hand Twenty-First Century Fox Inc (NASDAQ:FOX) is the least popular one with only 27 bullish hedge fund positions. Palo Alto Networks Inc (NYSE:PANW) 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately PANW wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PANW were disappointed as the stock returned 22.8% in 2019 (through December 23rd) 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 so far this year.
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.
