Were Hedge Funds Right About Souring On Seagate Technology plc (STX)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Seagate Technology plc (NASDAQ:STX) based on that data and determine whether they were really smart about the stock.

Seagate Technology plc (NASDAQ:STX) investors should pay attention to a decrease in hedge fund interest lately. STX was in 32 hedge funds’ portfolios at the end of March. There were 35 hedge funds in our database with STX holdings at the end of the previous quarter. Our calculations also showed that STX 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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. With all of this in mind let’s take a gander at the new hedge fund action encompassing Seagate Technology plc (NASDAQ:STX).

How are hedge funds trading Seagate Technology plc (NASDAQ:STX)?

At Q1’s end, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STX over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, ValueAct Capital held the most valuable stake in Seagate Technology plc (NASDAQ:STX), which was worth $1539.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $289.2 million worth of shares. AQR Capital Management, Antipodes Partners, and Two Sigma Advisors 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 ValueAct Capital allocated the biggest weight to Seagate Technology plc (NASDAQ:STX), around 22.12% of its 13F portfolio. 13D Management is also relatively very bullish on the stock, designating 5.53 percent of its 13F equity portfolio to STX.

Due to the fact that Seagate Technology plc (NASDAQ:STX) has experienced declining sentiment from hedge fund managers, we can see that there is a sect of hedge funds who were dropping their positions entirely heading into Q4. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest stake of the “upper crust” of funds tracked by Insider Monkey, totaling about $25.3 million in stock. John Hurley’s fund, Cavalry Asset Management, also said goodbye to its stock, about $7.6 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 3 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Seagate Technology plc (NASDAQ:STX) but similarly valued. These stocks are Galapagos NV (NASDAQ:GLPG), The J.M. Smucker Company (NYSE:SJM), Domino’s Pizza, Inc. (NYSE:DPZ), and Weyerhaeuser Co. (NYSE:WY). This group of stocks’ market caps resemble STX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.75 hedge funds with bullish positions and the average amount invested in these stocks was $646 million. That figure was $2206 million in STX’s case. Domino’s Pizza, Inc. (NYSE:DPZ) is the most popular stock in this table. On the other hand Galapagos NV (NASDAQ:GLPG) is the least popular one with only 15 bullish hedge fund positions. Seagate Technology plc (NASDAQ:STX) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately STX wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); STX investors were disappointed as the stock returned 0.5% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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