Were Hedge Funds Right About Embracing Fortinet Inc (FTNT)?

Keeping this in mind, let’s analyze whether Fortinet Inc (NASDAQ:FTNT) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Fortinet Inc (NASDAQ:FTNT) investors should be aware of an increase in support from the world’s most elite money managers of late. Fortinet Inc (NASDAQ:FTNT) was in 44 hedge funds’ portfolios at the end of June. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that FTNT 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.

Donald Sussman of Paloma Partners

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. With all of this in mind we’re going to take a look at the new hedge fund action encompassing Fortinet Inc (NASDAQ:FTNT).

What does smart money think about Fortinet Inc (NASDAQ:FTNT)?

Heading into the third quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 52% from one quarter earlier. On the other hand, there were a total of 34 hedge funds with a bullish position in FTNT a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Fortinet Inc (NASDAQ:FTNT), with a stake worth $820 million reported as of the end of September. Trailing Renaissance Technologies was Whale Rock Capital Management, which amassed a stake valued at $347.4 million. Two Sigma Advisors, Arrowstreet Capital, and AQR Capital Management 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 Chiron Investment Management allocated the biggest weight to Fortinet Inc (NASDAQ:FTNT), around 3.43% of its 13F portfolio. Whale Rock Capital Management is also relatively very bullish on the stock, designating 2.77 percent of its 13F equity portfolio to FTNT.

As aggregate interest increased, some big names have jumped into Fortinet Inc (NASDAQ:FTNT) headfirst. Millennium Management, managed by Israel Englander, initiated the most valuable position in Fortinet Inc (NASDAQ:FTNT). Millennium Management had $31.4 million invested in the company at the end of the quarter. Donald Sussman’s Paloma Partners also made a $12.5 million investment in the stock during the quarter. The following funds were also among the new FTNT investors: Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Greg Eisner’s Engineers Gate Manager.

Let’s now take a look at hedge fund activity in other stocks similar to Fortinet Inc (NASDAQ:FTNT). We will take a look at Archer Daniels Midland Company (NYSE:ADM), Palo Alto Networks Inc (NYSE:PANW), Genmab A/S (NASDAQ:GMAB), Dollar Tree, Inc. (NASDAQ:DLTR), LyondellBasell Industries NV (NYSE:LYB), Equity Residential (NYSE:EQR), and AvalonBay Communities Inc (NYSE:AVB). This group of stocks’ market values match FTNT’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.1 hedge funds with bullish positions and the average amount invested in these stocks was $1293 million. That figure was $1815 million in FTNT’s case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand Genmab A/S (NASDAQ:GMAB) is the least popular one with only 15 bullish hedge fund positions. Fortinet Inc (NASDAQ:FTNT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FTNT is 72.2. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately FTNT wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FTNT were disappointed as the stock returned -5% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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