Were These Hedge Funds Right About Selling NortonLifeLock Inc. (NLOK)?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to NortonLifeLock Inc. (NASDAQ:NLOK) changed recently.

NortonLifeLock Inc. (NASDAQ:NLOK) was in 37 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 46. NLOK investors should pay attention to a decrease in activity from the world’s largest hedge funds recently. There were 42 hedge funds in our database with NLOK positions at the end of the first quarter. Our calculations also showed that NLOK 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.

Henrik Rhenman of Rhenman & Partners Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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. With all of this in mind let’s analyze the new hedge fund action surrounding NortonLifeLock Inc. (NASDAQ:NLOK).

How are hedge funds trading NortonLifeLock Inc. (NASDAQ:NLOK)?

At second quarter’s end, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the previous quarter. On the other hand, there were a total of 35 hedge funds with a bullish position in NLOK a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Starboard Value LP was the largest shareholder of NortonLifeLock Inc. (NASDAQ:NLOK), with a stake worth $477.6 million reported as of the end of June. Trailing Starboard Value LP was Renaissance Technologies, which amassed a stake valued at $196.5 million. AQR Capital Management, Soros Fund Management, and Park West Asset 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 Starboard Value LP allocated the biggest weight to NortonLifeLock Inc. (NASDAQ:NLOK), around 17.02% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, setting aside 13.15 percent of its 13F equity portfolio to NLOK.

Due to the fact that NortonLifeLock Inc. (NASDAQ:NLOK) has witnessed falling interest from the smart money, we can see that there was a specific group of funds that decided to sell off their full holdings by the end of the second quarter. Intriguingly, Andrew Weiss’s Weiss Asset Management said goodbye to the largest investment of the 750 funds tracked by Insider Monkey, worth close to $53 million in stock, and Zachary Miller’s Parian Global Management was right behind this move, as the fund sold off about $18.8 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 5 funds by the end of the second quarter.

Let’s now take a look at hedge fund activity in other stocks similar to NortonLifeLock Inc. (NASDAQ:NLOK). We will take a look at Arch Capital Group Ltd. (NASDAQ:ACGL), PagSeguro Digital Ltd. (NYSE:PAGS), Expedia Group Inc (NASDAQ:EXPE), Brown & Brown, Inc. (NYSE:BRO), Open Text Corporation (NASDAQ:OTEX), Ceridian HCM Holding Inc. (NYSE:CDAY), and Shinhan Financial Group Co., Ltd. (NYSE:SHG). This group of stocks’ market caps are similar to NLOK’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.3 hedge funds with bullish positions and the average amount invested in these stocks was $1180 million. That figure was $1371 million in NLOK’s case. Expedia Group Inc (NASDAQ:EXPE) is the most popular stock in this table. On the other hand Shinhan Financial Group Co., Ltd. (NYSE:SHG) is the least popular one with only 2 bullish hedge fund positions. NortonLifeLock Inc. (NASDAQ:NLOK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NLOK is 53.8. 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 NLOK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NLOK were disappointed as the stock returned 4.3% 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.