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

In this article we are going to use hedge fund sentiment as a tool and determine whether Texas Instruments Incorporated (NASDAQ:TXN) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Texas Instruments Incorporated (NASDAQ:TXN) the right investment to pursue these days? The best stock pickers were in a bullish mood. The number of long hedge fund positions moved up by 9 recently. Texas Instruments Incorporated (NASDAQ:TXN) was in 55 hedge funds’ portfolios at the end of June. The all time high for this statistics is 60. Our calculations also showed that TXN 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.

David Blood of Generation Investment 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. Keeping this in mind let’s take a glance at the latest hedge fund action encompassing Texas Instruments Incorporated (NASDAQ:TXN).

What have hedge funds been doing with Texas Instruments Incorporated (NASDAQ:TXN)?

At the end of the second quarter, a total of 55 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from one quarter earlier. By comparison, 43 hedge funds held shares or bullish call options in TXN a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Texas Instruments Incorporated (NASDAQ:TXN) was held by Generation Investment Management, which reported holding $591.8 million worth of stock at the end of September. It was followed by AQR Capital Management with a $359 million position. Other investors bullish on the company included Diamond Hill Capital, Citadel Investment Group, and Alyeska Investment Group. In terms of the portfolio weights assigned to each position Heathbridge Capital Management allocated the biggest weight to Texas Instruments Incorporated (NASDAQ:TXN), around 4.71% of its 13F portfolio. Bristol Gate Capital Partners is also relatively very bullish on the stock, earmarking 4.54 percent of its 13F equity portfolio to TXN.

As one would reasonably expect, key money managers were breaking ground themselves. Alyeska Investment Group, managed by Anand Parekh, created the most valuable position in Texas Instruments Incorporated (NASDAQ:TXN). Alyeska Investment Group had $142.1 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $34.3 million position during the quarter. The other funds with new positions in the stock are Kevin Cottrell and Chris LaSusa’s KCL Capital, Mikal Patel’s Oribel Capital Management, and Matthew Hulsizer’s PEAK6 Capital Management.

Let’s now take a look at 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 Union Pacific Corporation (NYSE:UNP), American Tower Corporation (REIT) (NYSE:AMT), Shopify Inc (NYSE:SHOP), Linde plc (NYSE:LIN), Philip Morris International Inc. (NYSE:PM), International Business Machines Corp. (NYSE:IBM), and Citigroup Inc. (NYSE:C). This group of stocks’ market caps resemble TXN’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 61.9 hedge funds with bullish positions and the average amount invested in these stocks was $3911 million. That figure was $2132 million in TXN’s case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand International Business Machines Corp. (NYSE:IBM) is the least popular one with only 46 bullish hedge fund positions. Texas Instruments Incorporated (NASDAQ:TXN) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TXN is 46.5. 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. A small number of hedge funds were also right about betting on TXN as the stock returned 21.4% since the end of the second quarter (through 10/16) and outperformed the market by an even larger margin.

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