Were These Hedge Funds Right About Loading Up On Arista Networks Inc (ANET)?

In this article you are going to find out whether hedge funds think Arista Networks Inc (NYSE:ANET) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Arista Networks Inc (NYSE:ANET) undervalued? The best stock pickers were taking an optimistic view. The number of bullish hedge fund positions moved up by 9 recently. Arista Networks Inc (NYSE:ANET) was in 33 hedge funds’ portfolios at the end of June. The all time high for this statistics is 29. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ANET 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). There were 24 hedge funds in our database with ANET positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

John Overdeck of Two Sigma Advisors

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. With all of this in mind we’re going to go over the key hedge fund action encompassing Arista Networks Inc (NYSE:ANET).

What does smart money think about Arista Networks Inc (NYSE:ANET)?

Heading into the third quarter of 2020, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in ANET over the last 20 quarters. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

The largest stake in Arista Networks Inc (NYSE:ANET) was held by Renaissance Technologies, which reported holding $287 million worth of stock at the end of June. It was followed by Two Sigma Advisors with a $73.5 million position. Other investors bullish on the company included Citadel Investment Group, Arrowstreet Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Tenzing Global Investors allocated the biggest weight to Arista Networks Inc (NYSE:ANET), around 5.41% of its 13F portfolio. TwinBeech Capital is also relatively very bullish on the stock, setting aside 1.01 percent of its 13F equity portfolio to ANET.

With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the largest position in Arista Networks Inc (NYSE:ANET). Arrowstreet Capital had $25.7 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $6.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Jinghua Yan’s TwinBeech Capital, Qing Li’s Sciencast Management, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Arista Networks Inc (NYSE:ANET) but similarly valued. We will take a look at Baker Hughes Company (NYSE:BKR), Agnico Eagle Mines Limited (NYSE:AEM), ORIX Corporation (NYSE:IX), Trip.com Group Limited (NASDAQ:TCOM), Invitation Homes Inc. (NYSE:INVH), Check Point Software Technologies Ltd. (NASDAQ:CHKP), and Discover Financial Services (NYSE:DFS). This group of stocks’ market valuations are similar to ANET’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.9 hedge funds with bullish positions and the average amount invested in these stocks was $628 million. That figure was $510 million in ANET’s case. Discover Financial Services (NYSE:DFS) is the most popular stock in this table. On the other hand ORIX Corporation (NYSE:IX) is the least popular one with only 4 bullish hedge fund positions. Arista Networks Inc (NYSE:ANET) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ANET is 76.3. 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 positive signal but 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 beat the market again by 20.1 percentage points. Unfortunately ANET wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ANET were disappointed as the stock returned -0.5% 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 many of these stocks already outperformed the market so far this year.

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