Were These Hedge Funds Right About Dumping Microchip Technology Incorporated (MCHP)?

In this article we will check out the progression of hedge fund sentiment towards Microchip Technology Incorporated (NASDAQ:MCHP) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Microchip Technology Incorporated (NASDAQ:MCHP) has seen a decrease in hedge fund sentiment in recent months. Microchip Technology Incorporated (NASDAQ:MCHP) was in 33 hedge funds’ portfolios at the end of June. The all time high for this statistics is 46. There were 38 hedge funds in our database with MCHP holdings at the end of March. Our calculations also showed that MCHP 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.

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 56 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.

Kerr Neilson of Platinum Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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. Now we’re going to take a gander at the latest hedge fund action surrounding Microchip Technology Incorporated (NASDAQ:MCHP).

What have hedge funds been doing with Microchip Technology Incorporated (NASDAQ:MCHP)?

At Q2’s end, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MCHP over the last 20 quarters. 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 Microchip Technology Incorporated (NASDAQ:MCHP) was held by Platinum Asset Management, which reported holding $251.4 million worth of stock at the end of June. It was followed by D E Shaw with a $115.2 million position. Other investors bullish on the company included Point State Capital, Millennium Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Glaxis Capital Management allocated the biggest weight to Microchip Technology Incorporated (NASDAQ:MCHP), around 10.05% of its 13F portfolio. Platinum Asset Management is also relatively very bullish on the stock, earmarking 5.74 percent of its 13F equity portfolio to MCHP.

Due to the fact that Microchip Technology Incorporated (NASDAQ:MCHP) has witnessed declining sentiment from the smart money, it’s safe to say that there were a few funds that decided to sell off their full holdings heading into Q3. Interestingly, Joshua Friedman and Mitchell Julis’s Canyon Capital Advisors dumped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth close to $51.4 million in stock, and Andrew Wellington and Jeff Keswin’s Lyrical Asset Management was right behind this move, as the fund sold off about $43.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 5 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Microchip Technology Incorporated (NASDAQ:MCHP) but similarly valued. These stocks are Lloyds Banking Group PLC (NYSE:LYG), Franco-Nevada Corporation (NYSE:FNV), Manulife Financial Corporation (NYSE:MFC), AutoZone, Inc. (NYSE:AZO), Yum! Brands, Inc. (NYSE:YUM), Republic Services, Inc. (NYSE:RSG), and KKR & Co Inc. (NYSE:KKR). This group of stocks’ market valuations are closest to MCHP’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $1393 million. That figure was $891 million in MCHP’s case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 7 bullish hedge fund positions. Microchip Technology Incorporated (NASDAQ:MCHP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MCHP is 48.6. 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 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately MCHP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MCHP investors were disappointed as the stock returned 0.1% since the end of June (through 10/30) 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.