We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Synopsys, Inc. (NASDAQ:SNPS) shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that SNPS 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.
Ken Griffin of Citadel Investment Group
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. Keeping this in mind let’s view the new hedge fund action surrounding Synopsys, Inc. (NASDAQ:SNPS).
How are hedge funds trading Synopsys, Inc. (NASDAQ:SNPS)?
At Q3’s end, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 30 hedge funds with a bullish position in SNPS a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Panayotis Takis Sparaggis’s Alkeon Capital Management has the biggest position in Synopsys, Inc. (NASDAQ:SNPS), worth close to $419.8 million, comprising 1.5% of its total 13F portfolio. Sitting at the No. 2 spot is Citadel Investment Group, led by Ken Griffin, holding a $182.2 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish comprise John Armitage’s Egerton Capital Limited, David E. Shaw’s D E Shaw and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position One Tusk Investment Partners allocated the biggest weight to Synopsys, Inc. (NASDAQ:SNPS), around 5.86% of its 13F portfolio. Tairen Capital is also relatively very bullish on the stock, setting aside 3.27 percent of its 13F equity portfolio to SNPS.
Judging by the fact that Synopsys, Inc. (NASDAQ:SNPS) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedge funds who were dropping their entire stakes by the end of the third quarter. Intriguingly, Anand Parekh’s Alyeska Investment Group sold off the biggest investment of all the hedgies followed by Insider Monkey, worth close to $94.1 million in stock. Lee Ainslie’s fund, Maverick Capital, also sold off its stock, about $35.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 2 funds by the end of the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Synopsys, Inc. (NASDAQ:SNPS) but similarly valued. These stocks are Spotify Technology S.A. (NYSE:SPOT), Fresenius Medical Care AG & Co. (NYSE:FMS), Ameren Corporation (NYSE:AEE), and TAL Education Group, Inc. (NYSE:TAL). This group of stocks’ market values are similar to SNPS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SPOT | 37 | 1470342 | -5 |
| FMS | 5 | 3764 | -4 |
| AEE | 30 | 1557458 | 12 |
| TAL | 20 | 1504129 | -5 |
| Average | 23 | 1133923 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $1134 million. That figure was $1362 million in SNPS’s case. Spotify Technology S.A. (NYSE:SPOT) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. (NYSE:FMS) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Synopsys, Inc. (NASDAQ:SNPS) is more popular among hedge funds. 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. Hedge funds were also right about betting on SNPS as the stock returned 66.1% so far in 2019 (through 12/23) 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.
