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Hedge Funds Dropped The Ball On Analog Devices, Inc. (ADI)

Reymerlyn Martin

"Market volatility has picked up again over the past few weeks. Headlines highlight risks regarding interest rates, the Fed, China, house prices, auto sales, trade wars, and more. Uncertainty abounds. But doesn’t it always? I have no view on whether the recent volatility will continue for a while, or whether the market will be back at all-time highs before we know it. I remain focused on preserving and growing our capital, and continue to believe that the best way to do so is via a value-driven, concentrated, patient approach. I shun consensus holdings, rich valuations, and market fads, in favor of solid, yet frequently off-the-beaten-path, businesses run by excellent, aligned management teams, purchased at deep discounts to intrinsic value," are the words of Maran Capital's Dan Roller. His stock picks have been beating the S&P 500 Index handily. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Analog Devices, Inc. (NASDAQ:ADI) and see how it was affected.

Analog Devices, Inc. (NASDAQ:ADI) was in 23 hedge funds' portfolios at the end of December. ADI investors should be aware of a decrease in activity from the world's largest hedge funds of late. There were 28 hedge funds in our database with ADI holdings at the end of the previous quarter. Our calculations also showed that ADI isn't among the 30 most popular stocks among hedge funds.

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 32 percentage points since May 2014 through March 12, 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.

Jeffrey Talpins Element Capital

We're going to take a gander at the recent hedge fund action surrounding Analog Devices, Inc. (NASDAQ:ADI).

What have hedge funds been doing with Analog Devices, Inc. (NASDAQ:ADI)?

At the end of the fourth quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from one quarter earlier. On the other hand, there were a total of 27 hedge funds with a bullish position in ADI 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.

ADI_mar2019

More specifically, Generation Investment Management was the largest shareholder of Analog Devices, Inc. (NASDAQ:ADI), with a stake worth $916.8 million reported as of the end of September. Trailing Generation Investment Management was Cantillon Capital Management, which amassed a stake valued at $448.1 million. First Pacific Advisors LLC, Alkeon Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Analog Devices, Inc. (NASDAQ:ADI) has experienced falling interest from hedge fund managers, logic holds that there is a sect of fund managers who were dropping their positions entirely in the third quarter. At the top of the heap, Andreas Halvorsen's Viking Global dropped the largest position of the 700 funds monitored by Insider Monkey, valued at close to $103.1 million in stock. Brandon Haley's fund, Holocene Advisors, also sold off its stock, about $64 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 5 funds in the third quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Analog Devices, Inc. (NASDAQ:ADI) but similarly valued. We will take a look at Travelers Companies Inc (NYSE:TRV), Applied Materials, Inc. (NASDAQ:AMAT), Red Hat, Inc. (NYSE:RHT), and NetEase, Inc (NASDAQ:NTES). This group of stocks' market values are similar to ADI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRV,29,1226125,3 AMAT,40,1673666,-3 RHT,65,4018565,44 NTES,27,3285099,1 Average,40.25,2550864,11.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $2551 million. That figure was $2349 million in ADI's case. Red Hat, Inc. (NYSE:RHT) is the most popular stock in this table. On the other hand NetEase, Inc (NASDAQ:NTES) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Analog Devices, Inc. (NASDAQ:ADI) is even less popular than NTES. Hedge funds clearly dropped the ball on ADI though their other picks were more accurate. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. A handful of hedge funds were also right about betting on ADI as the stock returned 28.1% and outperformed the market as well.

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

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