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 Cadence Design Systems Inc (NASDAQ:CDNS) and determine whether hedge funds skillfully traded this stock.
Is Cadence Design Systems Inc (NASDAQ:CDNS) undervalued? Prominent investors were taking a bullish view. The number of long hedge fund bets went up by 8 recently. Cadence Design Systems Inc (NASDAQ:CDNS) was in 39 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 42. Our calculations also showed that CDNS 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.
If you'd ask most shareholders, hedge funds are perceived as unimportant, old investment tools of years past. While there are more than 8000 funds in operation at the moment, Our experts look at the upper echelon of this club, around 850 funds. These hedge fund managers direct bulk of the hedge fund industry's total capital, and by observing their highest performing stock picks, Insider Monkey has formulated a few investment strategies that have historically outpaced the broader indices. Insider Monkey's flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .
Noam Gottesman of GLG Partners
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 precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. With all of this in mind let's go over the new hedge fund action surrounding Cadence Design Systems Inc (NASDAQ:CDNS).
How are hedge funds trading Cadence Design Systems Inc (NASDAQ:CDNS)?
At the end of the second quarter, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 26% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CDNS over the last 20 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Alkeon Capital Management held the most valuable stake in Cadence Design Systems Inc (NASDAQ:CDNS), which was worth $493.4 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $161.2 million worth of shares. GLG Partners, Impax Asset Management, and Polar Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Lunia Capital allocated the biggest weight to Cadence Design Systems Inc (NASDAQ:CDNS), around 3.91% of its 13F portfolio. Mondrian Capital is also relatively very bullish on the stock, designating 1.98 percent of its 13F equity portfolio to CDNS.
Consequently, key hedge funds were leading the bulls' herd. Woodline Partners, managed by Michael Rockefeller and KarláKroeker, created the most valuable position in Cadence Design Systems Inc (NASDAQ:CDNS). Woodline Partners had $14.3 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners also made a $13.6 million investment in the stock during the quarter. The other funds with brand new CDNS positions are Tor Minesuk's Mondrian Capital, Mika Toikka's AlphaCrest Capital Management, and Peter Algert and Kevin Coldiron's Algert Coldiron Investors.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Cadence Design Systems Inc (NASDAQ:CDNS) but similarly valued. These stocks are The Kroger Co. (NYSE:KR), Microchip Technology Incorporated (NASDAQ:MCHP), Lloyds Banking Group PLC (NYSE:LYG), Franco-Nevada Corporation (NYSE:FNV), Manulife Financial Corporation (NYSE:MFC), AutoZone, Inc. (NYSE:AZO), and Yum! Brands, Inc. (NYSE:YUM). All of these stocks' market caps resemble CDNS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KR,41,2361525,-2 MCHP,33,890574,-5 LYG,7,14116,-2 FNV,23,1374566,2 MFC,19,171076,-1 AZO,55,2395499,10 YUM,47,1633184,6 Average,32.1,1262934,1.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.1 hedge funds with bullish positions and the average amount invested in these stocks was $1263 million. That figure was $1091 million in CDNS's case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 7 bullish hedge fund positions. Cadence Design Systems Inc (NASDAQ:CDNS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CDNS is 71.2. 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 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 still beat the market by 23.2 percentage points. Hedge funds were also right about betting on CDNS, though not to the same extent, as the stock returned 15.6% since the end of June and outperformed the market as well.
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Disclosure: None. This article was originally published at Insider Monkey.