It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 30 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 15.1% over the last 12 months (vs. 5.6% gain for SPY), with 53% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Arista Networks Inc (NYSE:ANET).
Hedge fund interest in Arista Networks Inc (NYSE:ANET) 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 Harris Corporation (NYSE:HRS), Marathon Oil Corporation (NYSE:MRO), and Verisk Analytics, Inc. (NASDAQ:VRSK) to gather more data points.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to take a look at the latest hedge fund action surrounding Arista Networks Inc (NYSE:ANET).
How are hedge funds trading Arista Networks Inc (NYSE:ANET)?
At the end of the third quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, no change from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in ANET over the last 13 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Arista Networks Inc (NYSE:ANET) was held by Renaissance Technologies, which reported holding $244.5 million worth of stock at the end of September. It was followed by AQR Capital Management with a $108.1 million position. Other investors bullish on the company included Citadel Investment Group, Two Sigma Advisors, and Polar Capital.
Judging by the fact that Arista Networks Inc (NYSE:ANET) has experienced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there exists a select few funds that elected to cut their entire stakes last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest position of the “upper crust” of funds watched by Insider Monkey, valued at close to $45 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also sold off its stock, about $19.8 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Arista Networks Inc (NYSE:ANET) but similarly valued. We will take a look at Harris Corporation (NYSE:HRS), Marathon Oil Corporation (NYSE:MRO), Verisk Analytics, Inc. (NASDAQ:VRSK), and DTE Energy Company (NYSE:DTE). This group of stocks’ market caps are closest to ANET’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HRS | 27 | 530950 | 2 |
| MRO | 39 | 1584494 | 1 |
| VRSK | 23 | 902227 | -5 |
| DTE | 25 | 706241 | 5 |
| Average | 28.5 | 930978 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $931 million. That figure was $575 million in ANET’s case. Marathon Oil Corporation (NYSE:MRO) is the most popular stock in this table. On the other hand Verisk Analytics, Inc. (NASDAQ:VRSK) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Arista Networks Inc (NYSE:ANET) is even less popular than VRSK. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.
Disclosure: None. This article was originally published at Insider Monkey.
