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Hedge Funds Are Crazy About Semtech Corporation (SMTC)

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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 Semtech Corporation (NASDAQ:SMTC).

Semtech Corporation (NASDAQ:SMTC) was in 28 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic was previously 25. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. SMTC has seen an increase in hedge fund sentiment recently. There were 21 hedge funds in our database with SMTC holdings at the end of March. Our calculations also showed that SMTC isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 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 79 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.

best defensive stocks to buy according to ken fisher
best defensive stocks to buy according to ken fisher

Ken Fisher of Fisher 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 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind we're going to analyze the recent hedge fund action encompassing Semtech Corporation (NASDAQ:SMTC).

Do Hedge Funds Think SMTC Is A Good Stock To Buy Now?

At second quarter's end, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from the previous quarter. By comparison, 25 hedge funds held shares or bullish call options in SMTC a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SMTC A Good Stock To Buy?
Is SMTC A Good Stock To Buy?

The largest stake in Semtech Corporation (NASDAQ:SMTC) was held by Fisher Asset Management, which reported holding $89.6 million worth of stock at the end of June. It was followed by Millennium Management with a $84 million position. Other investors bullish on the company included Schonfeld Strategic Advisors, Arrowstreet Capital, and D E Shaw. In terms of the portfolio weights assigned to each position SG Capital Management allocated the biggest weight to Semtech Corporation (NASDAQ:SMTC), around 2.67% of its 13F portfolio. Force Hill Capital Management is also relatively very bullish on the stock, dishing out 1.16 percent of its 13F equity portfolio to SMTC.

Consequently, key hedge funds were breaking ground themselves. Schonfeld Strategic Advisors, managed by Ryan Tolkin (CIO), created the most outsized position in Semtech Corporation (NASDAQ:SMTC). Schonfeld Strategic Advisors had $27.2 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management also made a $10.6 million investment in the stock during the quarter. The following funds were also among the new SMTC investors: Ken Grossman and Glen Schneider's SG Capital Management, Dmitry Balyasny's Balyasny Asset Management, and Suraj Parkash Chopra's Force Hill Capital Management.

Let's also examine hedge fund activity in other stocks similar to Semtech Corporation (NASDAQ:SMTC). These stocks are Oscar Health, Inc. (NYSE:OSCR), BRF SA (NYSE:BRFS), Grupo Simec S.A.B. de C.V. (NYSE:SIM), Navistar International Corp (NYSE:NAV), UniFirst Corp (NYSE:UNF), B2Gold Corp (NYSE:BTG), and World Wrestling Entertainment, Inc. (NYSE:WWE). This group of stocks' market values are similar to SMTC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OSCR,16,1050662,-10 BRFS,6,4320,-2 SIM,1,7147,0 NAV,22,1369292,1 UNF,14,53504,-3 BTG,15,251317,-3 WWE,33,256915,8 Average,15.3,427594,-1.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.3 hedge funds with bullish positions and the average amount invested in these stocks was $428 million. That figure was $376 million in SMTC's case. World Wrestling Entertainment, Inc. (NYSE:WWE) is the most popular stock in this table. On the other hand Grupo Simec S.A.B. de C.V. (NYSE:SIM) is the least popular one with only 1 bullish hedge fund positions. Semtech Corporation (NASDAQ:SMTC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SMTC is 82.2. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. Hedge funds were also right about betting on SMTC as the stock returned 12% since the end of Q2 (through 10/15) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.