How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Lattice Semiconductor Corporation (NASDAQ:LSCC) and determine whether hedge funds had an edge regarding this stock.
Is Lattice Semiconductor Corporation (NASDAQ:LSCC) a superb stock to buy now? The smart money was cutting their exposure. The number of long hedge fund positions fell by 7 in recent months. Lattice Semiconductor Corporation (NASDAQ:LSCC) was in 19 hedge funds' portfolios at the end of June. The all time high for this statistics is 32. Our calculations also showed that LSCC 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.
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 was 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Chuck Royce of Royce & Associates
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 are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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 check out the new hedge fund action encompassing Lattice Semiconductor Corporation (NASDAQ:LSCC).
How have hedgies been trading Lattice Semiconductor Corporation (NASDAQ:LSCC)?
At the end of the second quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LSCC over the last 20 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Brian Ashford-Russell and Tim Woolley's Polar Capital has the number one position in Lattice Semiconductor Corporation (NASDAQ:LSCC), worth close to $64.3 million, amounting to 0.6% of its total 13F portfolio. The second largest stake is held by Columbus Circle Investors, managed by Principal Global Investors, which holds a $25.4 million position; 1% of its 13F portfolio is allocated to the stock. Remaining peers with similar optimism encompass Chuck Royce's Royce & Associates, Didric Cederholm's Lion Point and John Overdeck and David Siegel's Two Sigma Advisors. In terms of the portfolio weights assigned to each position Southport Management allocated the biggest weight to Lattice Semiconductor Corporation (NASDAQ:LSCC), around 3.19% of its 13F portfolio. Lion Point is also relatively very bullish on the stock, designating 2.88 percent of its 13F equity portfolio to LSCC.
Since Lattice Semiconductor Corporation (NASDAQ:LSCC) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there exists a select few hedgies who were dropping their full holdings in the second quarter. Interestingly, Mike Masters's Masters Capital Management cut the biggest stake of the 750 funds watched by Insider Monkey, comprising about $9.4 million in stock. Richard SchimeláandáLawrence Sapanski's fund, Cinctive Capital Management, also sold off its stock, about $2.5 million worth. These transactions are interesting, as total hedge fund interest was cut by 7 funds in the second quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Lattice Semiconductor Corporation (NASDAQ:LSCC) but similarly valued. We will take a look at Armstrong World Industries, Inc. (NYSE:AWI), Western Alliance Bancorporation (NYSE:WAL), GW Pharmaceuticals plc (NASDAQ:GWPH), National Fuel Gas Company (NYSE:NFG), Hutchison China MediTech Limited (NASDAQ:HCM), Southwest Gas Holdings, Inc. (NYSE:SWX), and Houlihan Lokey Inc (NYSE:HLI). This group of stocks' market valuations are similar to LSCC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AWI,34,372376,14 WAL,24,139929,-3 GWPH,18,350605,-3 NFG,22,174710,4 HCM,7,34538,1 SWX,13,83518,0 HLI,24,146572,9 Average,20.3,186035,3.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.3 hedge funds with bullish positions and the average amount invested in these stocks was $186 million. That figure was $163 million in LSCC's case. Armstrong World Industries, Inc. (NYSE:AWI) is the most popular stock in this table. On the other hand Hutchison China MediTech Limited (NASDAQ:HCM) is the least popular one with only 7 bullish hedge fund positions. Lattice Semiconductor Corporation (NASDAQ:LSCC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for LSCC is 38. 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 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately LSCC wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); LSCC investors were disappointed as the stock returned 2% in the third quarter 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.
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Disclosure: None. This article was originally published at Insider Monkey.