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 Teradyne, Inc. (NASDAQ:TER) and determine whether hedge funds had an edge regarding this stock.
Teradyne, Inc. (NASDAQ:TER) was in 34 hedge funds' portfolios at the end of June. The all time high for this statistics is 40. TER shareholders have witnessed an increase in hedge fund interest in recent months. There were 28 hedge funds in our database with TER holdings at the end of March. Our calculations also showed that TER 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.
Ken Heebner of Capital Growth Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now let's go over the recent hedge fund action surrounding Teradyne, Inc. (NASDAQ:TER).
What does smart money think about Teradyne, Inc. (NASDAQ:TER)?
At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from the first quarter of 2020. On the other hand, there were a total of 27 hedge funds with a bullish position in TER a year ago. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the biggest position in Teradyne, Inc. (NASDAQ:TER), worth close to $446.6 million, accounting for 0.4% of its total 13F portfolio. Coming in second is Alkeon Capital Management, managed by Panayotis Takis Sparaggis, which holds a $260.6 million position; 0.7% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions consist of Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, John Overdeck and David Siegel's Two Sigma Advisors and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position Capital Growth Management allocated the biggest weight to Teradyne, Inc. (NASDAQ:TER), around 3.09% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, designating 2.68 percent of its 13F equity portfolio to TER.
As aggregate interest increased, specific money managers have been driving this bullishness. Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, initiated the biggest position in Teradyne, Inc. (NASDAQ:TER). Polar Capital had $64.9 million invested in the company at the end of the quarter. Ken Heebner's Capital Growth Management also initiated a $26.6 million position during the quarter. The following funds were also among the new TER investors: Phill Gross and Robert Atchinson's Adage Capital Management, Charles Clough's Clough Capital Partners, and Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners.
Let's now take a look at hedge fund activity in other stocks similar to Teradyne, Inc. (NASDAQ:TER). We will take a look at Dover Corporation (NYSE:DOV), Rollins, Inc. (NYSE:ROL), International Paper Company (NYSE:IP), The Hartford Financial Services Group Inc (NYSE:HIG), Tyler Technologies, Inc. (NYSE:TYL), ONEOK, Inc. (NYSE:OKE), and Pembina Pipeline Corp (NYSE:PBA). This group of stocks' market values match TER's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOV,40,683970,9 ROL,29,577262,4 IP,29,238219,0 HIG,39,917896,2 TYL,36,533929,6 OKE,25,117132,0 PBA,10,89252,-5 Average,29.7,451094,2.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.7 hedge funds with bullish positions and the average amount invested in these stocks was $451 million. That figure was $1354 million in TER's case. Dover Corporation (NYSE:DOV) is the most popular stock in this table. On the other hand Pembina Pipeline Corp (NYSE:PBA) is the least popular one with only 10 bullish hedge fund positions. Teradyne, Inc. (NASDAQ:TER) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TER is 75.5. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately TER wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TER were disappointed as the stock returned 0.5% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.