Hedge funds are not perfect. They have their bad picks just like everyone else. Facebook, a stock hedge funds have loved dearly, lost nearly 40% of its value at one point in 2018. Although hedge funds are not perfect, their consensus picks do deliver solid returns, however. Our data show the top 20 S&P 500 stocks among hedge funds beat the S&P 500 Index by more than 6 percentage points so far in 2019. Because hedge funds have a lot of resources and their consensus picks do well, we pay attention to what they think. In this article, we analyze what the elite funds think of F5 Networks, Inc. (NASDAQ:FFIV).
Hedge fund interest in F5 Networks, Inc. (NASDAQ:FFIV) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Okta, Inc. (NASDAQ:OKTA), Alliance Data Systems Corporation (NYSE:ADS), and MarketAxess Holdings Inc. (NASDAQ:MKTX) to gather more data points.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
[caption id="attachment_745225" align="aligncenter" width="473"] Noam Gottesman, GLG Partners[/caption]
Let's analyze the recent hedge fund action regarding F5 Networks, Inc. (NASDAQ:FFIV).
How have hedgies been trading F5 Networks, Inc. (NASDAQ:FFIV)?
Heading into the second quarter of 2019, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 26 hedge funds held shares or bullish call options in FFIV a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
The largest stake in F5 Networks, Inc. (NASDAQ:FFIV) was held by Renaissance Technologies, which reported holding $409.6 million worth of stock at the end of March. It was followed by AQR Capital Management with a $299.4 million position. Other investors bullish on the company included Arrowstreet Capital, D E Shaw, and GLG Partners.
Due to the fact that F5 Networks, Inc. (NASDAQ:FFIV) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there was a specific group of money managers that elected to cut their entire stakes last quarter. Interestingly, Matthew Tewksbury's Stevens Capital Management dropped the biggest position of the "upper crust" of funds watched by Insider Monkey, worth close to $8.5 million in stock, and Benjamin A. Smith's Laurion Capital Management was right behind this move, as the fund sold off about $7.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks similar to F5 Networks, Inc. (NASDAQ:FFIV). We will take a look at Okta, Inc. (NASDAQ:OKTA), Alliance Data Systems Corporation (NYSE:ADS), MarketAxess Holdings Inc. (NASDAQ:MKTX), and Arconic Inc. (NYSE:ARNC). This group of stocks' market values match FFIV's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OKTA,43,995674,3 ADS,38,1907491,-1 MKTX,15,218079,-2 ARNC,34,2519979,-12 Average,32.5,1410306,-3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $1410 million. That figure was $1047 million in FFIV's case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand MarketAxess Holdings Inc. (NASDAQ:MKTX) is the least popular one with only 15 bullish hedge fund positions. F5 Networks, Inc. (NASDAQ:FFIV) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately FFIV wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FFIV investors were disappointed as the stock returned -13.3% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.