Should I Buy Silicom Ltd. (SILC)?
Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 817 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Silicom Ltd. (NASDAQ:SILC) in this article.
Silicom Ltd. (NASDAQ:SILC) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds' portfolios at the end of September. Our calculations also showed that SILC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare SILC to other stocks including Metropolitan Bank Holding Corp. (NYSE:MCB), Orion Energy Systems, Inc. (NASDAQ:OESX), and The ExOne Company (NASDAQ:XONE) to get a better sense of its popularity.
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 66 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.
Peter Rathjens of Arrowstreet Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. With all of this in mind we're going to analyze the fresh hedge fund action regarding Silicom Ltd. (NASDAQ:SILC).
How have hedgies been trading Silicom Ltd. (NASDAQ:SILC)?
Heading into the fourth quarter of 2020, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 6 hedge funds with a bullish position in SILC a year ago. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
More specifically, AWH Capital was the largest shareholder of Silicom Ltd. (NASDAQ:SILC), with a stake worth $3.1 million reported as of the end of September. Trailing AWH Capital was Intrepid Capital Management, which amassed a stake valued at $2.3 million. Renaissance Technologies, D E Shaw, and Arrowstreet Capital 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 AWH Capital allocated the biggest weight to Silicom Ltd. (NASDAQ:SILC), around 4.39% of its 13F portfolio. Intrepid Capital Management is also relatively very bullish on the stock, setting aside 1.31 percent of its 13F equity portfolio to SILC.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Two Sigma Advisors. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Arrowstreet Capital).
Let's also examine hedge fund activity in other stocks similar to Silicom Ltd. (NASDAQ:SILC). These stocks are Metropolitan Bank Holding Corp. (NYSE:MCB), Orion Energy Systems, Inc. (NASDAQ:OESX), The ExOne Company (NASDAQ:XONE), Summit Therapeutics Inc. (NASDAQ:SMMT), Hometrust Bancshares Inc (NASDAQ:HTBI), Gladstone Capital Corporation (NASDAQ:GLAD), and Alta Equipment Group Inc. (NYSE:ALTG). This group of stocks' market values are closest to SILC's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MCB,7,41108,0 OESX,7,25463,1 XONE,5,3869,3 SMMT,1,1044,-2 HTBI,11,38106,-1 GLAD,3,3304,-1 ALTG,13,35500,-3 Average,6.7,21199,-0.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.7 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. That figure was $7 million in SILC's case. Alta Equipment Group Inc. (NYSE:ALTG) is the most popular stock in this table. On the other hand Summit Therapeutics Inc. (NASDAQ:SMMT) is the least popular one with only 1 bullish hedge fund positions. Silicom Ltd. (NASDAQ:SILC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SILC is 40.4. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. A small number of hedge funds were also right about betting on SILC as the stock returned 19.9% since the end of the third quarter (through 11/27) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.
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