Were Hedge Funds Right About Souring On Applied Materials, Inc. (AMAT)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Applied Materials, Inc. (NASDAQ:AMAT) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Applied Materials, Inc. (NASDAQ:AMAT) was in 56 hedge funds’ portfolios at the end of March. AMAT shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. There were 72 hedge funds in our database with AMAT holdings at the end of the previous quarter. Our calculations also showed that AMAT isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

William Von Mueffling of Cantillon Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a gander at the recent hedge fund action surrounding Applied Materials, Inc. (NASDAQ:AMAT).

What have hedge funds been doing with Applied Materials, Inc. (NASDAQ:AMAT)?

At the end of the first quarter, a total of 56 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -22% from one quarter earlier. On the other hand, there were a total of 42 hedge funds with a bullish position in AMAT a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

More specifically, AQR Capital Management was the largest shareholder of Applied Materials, Inc. (NASDAQ:AMAT), with a stake worth $298 million reported as of the end of September. Trailing AQR Capital Management was Matrix Capital Management, which amassed a stake valued at $225.1 million. Lansdowne Partners, Generation Investment Management, and Arrowstreet Capital 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 Lansdowne Partners allocated the biggest weight to Applied Materials, Inc. (NASDAQ:AMAT), around 11.52% of its 13F portfolio. Praesidium Investment Management Company is also relatively very bullish on the stock, earmarking 6.09 percent of its 13F equity portfolio to AMAT.

Since Applied Materials, Inc. (NASDAQ:AMAT) has experienced declining sentiment from hedge fund managers, it’s easy to see that there were a few hedgies who sold off their full holdings in the first quarter. Intriguingly, Gavin M. Abrams’s Abrams Bison Investments sold off the biggest position of the 750 funds watched by Insider Monkey, valued at close to $117.9 million in stock. Brandon Haley’s fund, Holocene Advisors, also said goodbye to its stock, about $46.4 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 16 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Applied Materials, Inc. (NASDAQ:AMAT) but similarly valued. These stocks are Pinduoduo Inc. (NASDAQ:PDD), TC Energy Corporation (NYSE:TRP), Humana Inc (NYSE:HUM), and Truist Financial Corporation (NYSE:TFC). This group of stocks’ market caps are closest to AMAT’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $1663 million. That figure was $2318 million in AMAT’s case. Humana Inc (NYSE:HUM) is the most popular stock in this table. On the other hand TC Energy Corporation (NYSE:TRP) is the least popular one with only 24 bullish hedge fund positions. Applied Materials, Inc. (NASDAQ:AMAT) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on AMAT as the stock returned 32.5% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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