Were Hedge Funds Right About Texas Instruments Incorporated (TXN)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Texas Instruments Incorporated (NASDAQ:TXN) and determine whether hedge funds had an edge regarding this stock.

Texas Instruments Incorporated (NASDAQ:TXN) shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that TXN 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.

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 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. 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.

Bruce Kovner of Caxton Associates LP

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. Keeping this in mind we’re going to go over the recent hedge fund action encompassing Texas Instruments Incorporated (NASDAQ:TXN).

Hedge fund activity in Texas Instruments Incorporated (NASDAQ:TXN)

At the end of the first quarter, a total of 46 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the previous quarter. On the other hand, there were a total of 43 hedge funds with a bullish position in TXN a year ago. With hedgies’ 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, Generation Investment Management held the most valuable stake in Texas Instruments Incorporated (NASDAQ:TXN), which was worth $476.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $320.3 million worth of shares. Diamond Hill Capital, Citadel Investment Group, and Adage 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 Heathbridge Capital Management allocated the biggest weight to Texas Instruments Incorporated (NASDAQ:TXN), around 5.61% of its 13F portfolio. Bristol Gate Capital Partners is also relatively very bullish on the stock, earmarking 4.39 percent of its 13F equity portfolio to TXN.

Because Texas Instruments Incorporated (NASDAQ:TXN) has faced declining sentiment from hedge fund managers, logic holds that there were a few hedgies that slashed their positions entirely in the first quarter. Intriguingly, Alex Snow’s Lansdowne Partners said goodbye to the biggest investment of the 750 funds watched by Insider Monkey, comprising close to $141.3 million in stock, and Michael Rockefeller and KarláKroeker’s Woodline Partners was right behind this move, as the fund sold off about $69.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 4 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Texas Instruments Incorporated (NASDAQ:TXN) but similarly valued. We will take a look at BHP Group (NYSE:BHP), Linde plc (NYSE:LIN), Citigroup Inc. (NYSE:C), and Royal Bank of Canada (NYSE:RY). This group of stocks’ market values are similar to TXN’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 43.25 hedge funds with bullish positions and the average amount invested in these stocks was $2361 million. That figure was $1745 million in TXN’s case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand Royal Bank of Canada (NYSE:RY) is the least popular one with only 16 bullish hedge fund positions. Texas Instruments Incorporated (NASDAQ:TXN) 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 TXN as the stock returned 28.1% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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