Two Semiconductors Stocks Beat the Market Today; Should You Follow Hedge Funds Into Them?

The S&P 500 is down 1.5% and the NASDAQ lost 1.8% in morning trade as macro uncertainty weighs. Among the few stocks in the green are semiconductor companies Intel Corporation (NASDAQ:INTC) and Atmel Corporation (NASDAQ:ATML), which are up by 0.5% and 3.18% respectively. Let’s find out why investors are buying their shares and see if the smart money agrees with today’s sentiment.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by around 60 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. a 58% gain for the S&P 500 Index (read more details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Intel Corporation (NASDAQ:INTC) shares are rallying because of the follow-on momentum generated from analyst upgrades. Bernstein upgraded Intel on September 23 to ‘Market Perform’ from ‘Underperform’, noting Intel’s client business channel inventory appears to be falling faster than expected. JMP Securities upgraded Intel a few days later to ‘Market Perform’ from ‘Underperform’, citing the same trend. Overall, five analysts have a ‘Sell’ rating, 18 have a ‘Hold’ rating, and 24 have a ‘Buy’ rating on Intel, with a consensus price target of $34.62 per share.

With the recent launch of Windows 10, PC sales could be stronger than anticipated as pent-up demand drives transactions. Intel shares are themselves cheap, with a forward PE of 12.4 and a dividend yield of 3.3%. Given the flurry of upgrades, the Windows 10 launch, and Intel’s cheap valuation, investors could also be buying in anticipation of further analyst upgrades and a good quarterly earnings report on October 13.

While analysts are more bullish on Intel, the smart money is more cautious. According to our database of around 730 funds, the total number of hedge fund investors long Intel Corporation (NASDAQ:INTC) declined to 48 at the end of June from 61 at the end of March and the total value of hedge funds’ holdings decreased to $4.2 billion (2.9% of the float) from $5.2 billion on March 31. Among the hedge funds that cut their positions in the second quarter were First Eagle Investment Management, which trimmed its holding by 2% to 28.48 million shares, and Richard Pzena’s Pzena Investment Management, which pared its stake by 4% to 11.24 million shares. Ross Margolies’ Stelliam Investment Management cut its holdings by 27% to 5.34 million shares too. Going the opposite way was Peter Rathjens, Bruce Clarke And John Campbell’s Arrowstreet Capital, which increased its holding by 6% to 12.84 million shares, and Cliff Asness’ AQR Capital Management, which upped its stake by 20% to 11.88 million shares. 

Atmel Corporation (NASDAQ:ATML) shares are rallying because Reuters is reporting that Cypress Semiconductor Corporation (NASDAQ:CY) is planning a bid to acquire Atmel after the technology company agreed to sell itself to Dialog Semiconductor earlier this month. Cypress Semiconductor’s bid will have to be higher than Dialog Semiconductor’s offer of approximately $4.6 billion in cash and stock in order to succeed. The semiconductor industry has experienced a wave of M&A as the era of cheap debt comes to an end.

Hedge funds liked Atmel Corporation (NASDAQ:ATML) in the second quarter. According to our data, the number of funds long Atmel increased to 36 from 28 in the prior quarter, while the total value of hedge fund holdings increased to $364.64 million from $202.18 million. Among the hedge funds that increased their positions were Soros Fund Management, which increased its position by 64% to 5.17 million shares, and Panayotis Takis Sparaggis’s Alkeon Capital Management, which increased its position by 413% to 5.13 million shares. Dmitry Balyasny’s Balyasny Asset Management also increased its position by 128% to 4.72 million shares.

Disclosure: None