Were Hedge Funds Right About Crowding Into Lam Research Corporation (LRCX)?

In this article you are going to find out whether hedge funds think Lam Research Corporation (NASDAQ:LRCX) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Lam Research Corporation (NASDAQ:LRCX) going to take off soon? Money managers were in an optimistic mood. The number of bullish hedge fund bets rose by 8 in recent months. Lam Research Corporation (NASDAQ:LRCX) was in 62 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 56. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LRCX 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).

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.

Philippe Laffont of Coatue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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 we’re going to go over the fresh hedge fund action surrounding Lam Research Corporation (NASDAQ:LRCX).

How are hedge funds trading Lam Research Corporation (NASDAQ:LRCX)?

At the end of the second quarter, a total of 62 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LRCX over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Among these funds, Coatue Management held the most valuable stake in Lam Research Corporation (NASDAQ:LRCX), which was worth $308 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $269.7 million worth of shares. AQR Capital Management, Alkeon Capital Management, and Lansdowne Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Marlowe Partners allocated the biggest weight to Lam Research Corporation (NASDAQ:LRCX), around 13.26% of its 13F portfolio. Heard Capital is also relatively very bullish on the stock, setting aside 9.99 percent of its 13F equity portfolio to LRCX.

With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls’ herd. Holocene Advisors, managed by Brandon Haley, created the most outsized position in Lam Research Corporation (NASDAQ:LRCX). Holocene Advisors had $160.2 million invested in the company at the end of the quarter. Joe DiMenna’s ZWEIG DIMENNA PARTNERS also initiated a $6.6 million position during the quarter. The other funds with new positions in the stock are Benjamin A. Smith’s Laurion Capital Management, Ravee Mehta’s Nishkama Capital, and Joshua Nash’s Ulysses Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Lam Research Corporation (NASDAQ:LRCX) but similarly valued. These stocks are The Progressive Corporation (NYSE:PGR), Square, Inc. (NYSE:SQ), Relx PLC (NYSE:RELX), Analog Devices, Inc. (NASDAQ:ADI), Westpac Banking Corporation (NYSE:WBK), ConocoPhillips (NYSE:COP), and Norfolk Southern Corp. (NYSE:NSC). All of these stocks’ market caps are similar to LRCX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $1345 million. That figure was $2538 million in LRCX’s case. Square, Inc. (NYSE:SQ) is the most popular stock in this table. On the other hand Westpac Banking Corporation (NYSE:WBK) is the least popular one with only 4 bullish hedge fund positions. Lam Research Corporation (NASDAQ:LRCX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LRCX is 86.8. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on LRCX, though not to the same extent, as the stock returned 13.3% since Q2 (through October 16th) and outperformed the market as well.

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