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Hedge Funds Are Dumping Tower Semiconductor Ltd. (TSEM)

Asma UL Husna
·6 min read

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Tower Semiconductor Ltd. (NASDAQ:TSEM) and determine whether hedge funds skillfully traded this stock.

Tower Semiconductor Ltd. (NASDAQ:TSEM) has seen a decrease in support from the world's most elite money managers lately. Our calculations also showed that TSEM isn't among the 30 most popular stocks among hedge funds (click for Q1 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 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 58 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.

[caption id="attachment_746830" align="aligncenter" width="392"] Matthew Hulsizer of PEAK6 Capital[/caption]

Matthew Hulsizer PEAK6 Capital
Matthew Hulsizer PEAK6 Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we're going to take a glance at the fresh hedge fund action surrounding Tower Semiconductor Ltd. (NASDAQ:TSEM).

How have hedgies been trading Tower Semiconductor Ltd. (NASDAQ:TSEM)?

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -31% from one quarter earlier. By comparison, 12 hedge funds held shares or bullish call options in TSEM a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Rima Senvest Management, managed by Richard Mashaal, holds the most valuable position in Tower Semiconductor Ltd. (NASDAQ:TSEM). Rima Senvest Management has a $128.2 million position in the stock, comprising 15% of its 13F portfolio. Coming in second is Shelter Haven Capital Management, led by Jerry Kochanski, holding a $39.6 million position; the fund has 15% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish consist of D. E. Shaw's D E Shaw, Renaissance Technologies and David Zorub's Parsifal Capital Management. In terms of the portfolio weights assigned to each position Shelter Haven Capital Management allocated the biggest weight to Tower Semiconductor Ltd. (NASDAQ:TSEM), around 15.02% of its 13F portfolio. Rima Senvest Management is also relatively very bullish on the stock, dishing out 15.02 percent of its 13F equity portfolio to TSEM.

Due to the fact that Tower Semiconductor Ltd. (NASDAQ:TSEM) has witnessed declining sentiment from the aggregate hedge fund industry, it's safe to say that there is a sect of hedgies that elected to cut their full holdings heading into Q4. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the largest stake of all the hedgies monitored by Insider Monkey, comprising close to $9.6 million in stock. Richard Driehaus's fund, Driehaus Capital, also said goodbye to its stock, about $8.2 million worth. These transactions are important to note, as total hedge fund interest dropped by 5 funds heading into Q4.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Tower Semiconductor Ltd. (NASDAQ:TSEM) but similarly valued. We will take a look at Xencor Inc (NASDAQ:XNCR), Micro Focus Intl PLC (NYSE:MFGP), CIT Group Inc. (NYSE:CIT), and YETI Holdings, Inc. (NYSE:YETI). All of these stocks' market caps are closest to TSEM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XNCR,13,162286,-3 MFGP,9,13639,-2 CIT,37,315095,2 YETI,20,57055,3 Average,19.75,137019,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $137 million. That figure was $272 million in TSEM's case. CIT Group Inc. (NYSE:CIT) is the most popular stock in this table. On the other hand Micro Focus Intl PLC (NYSE:MFGP) is the least popular one with only 9 bullish hedge fund positions. Tower Semiconductor Ltd. (NASDAQ:TSEM) 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 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately TSEM wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); TSEM investors were disappointed as the stock returned 19.9% during the second 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.

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