Was The Smart Money Right About Crowding Into Monolithic Power Systems, Inc. (MPWR)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Monolithic Power Systems, Inc. (NASDAQ:MPWR).

Is Monolithic Power Systems, Inc. (NASDAQ:MPWR) a great investment right now? Hedge funds were betting on the stock. The number of bullish hedge fund positions advanced by 13 in recent months. Monolithic Power Systems, Inc. (NASDAQ:MPWR) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 27. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that MPWR isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 23 hedge funds in our database with MPWR positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 56 percentage points since March 2017 (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.

Alex Sacerdote of Whale Rock Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s view the new hedge fund action surrounding Monolithic Power Systems, Inc. (NASDAQ:MPWR).

What does smart money think about Monolithic Power Systems, Inc. (NASDAQ:MPWR)?

At Q2’s end, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 57% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in MPWR a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Alex Sacerdote’s Whale Rock Capital Management has the most valuable position in Monolithic Power Systems, Inc. (NASDAQ:MPWR), worth close to $187.7 million, corresponding to 1.5% of its total 13F portfolio. The second most bullish fund manager is GQG Partners, led by Rajiv Jain, holding a $181.3 million position; 0.8% of its 13F portfolio is allocated to the stock. Some other members of the smart money that hold long positions encompass John Hurley’s Cavalry Asset Management, Renaissance Technologies and John Osterweis’s Osterweis Capital Management. In terms of the portfolio weights assigned to each position Cavalry Asset Management allocated the biggest weight to Monolithic Power Systems, Inc. (NASDAQ:MPWR), around 6.64% of its 13F portfolio. Osterweis Capital Management is also relatively very bullish on the stock, dishing out 1.71 percent of its 13F equity portfolio to MPWR.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Woodline Partners, managed by Michael Rockefeller and KarláKroeker, created the most valuable position in Monolithic Power Systems, Inc. (NASDAQ:MPWR). Woodline Partners had $9.5 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $4.3 million investment in the stock during the quarter. The following funds were also among the new MPWR investors: Benjamin A. Smith’s Laurion Capital Management, Joel Greenblatt’s Gotham Asset Management, and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Monolithic Power Systems, Inc. (NASDAQ:MPWR) but similarly valued. These stocks are argenx SE (NASDAQ:ARGX), Molina Healthcare, Inc. (NYSE:MOH), Royal Caribbean Group (NYSE:RCL), Avalara, Inc. (NYSE:AVLR), CBOE Global Markets Inc (NASDAQ:CBOE), Huazhu Group Limited (NASDAQ:HTHT), and Icahn Enterprises LP (NASDAQ:IEP). This group of stocks’ market values resemble MPWR’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $2217 million. That figure was $556 million in MPWR’s case. Avalara, Inc. (NYSE:AVLR) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 3 bullish hedge fund positions. Monolithic Power Systems, Inc. (NASDAQ:MPWR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MPWR is 88.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on MPWR as the stock returned 35.1% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.