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Hedge Funds Have Never Been This Bullish On Analog Devices, Inc. (ADI)

Nina Todic

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Analog Devices, Inc. (NASDAQ:ADI).

Analog Devices, Inc. (NASDAQ:ADI) investors should be aware of an increase in enthusiasm from smart money recently. ADI was in 44 hedge funds' portfolios at the end of June. There were 40 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 40 percentage points since May 2014 through May 30, 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.

William Von Mueffling - Cantillon Capital Management

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's check out the fresh hedge fund action regarding Analog Devices, Inc. (NASDAQ:ADI).

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

Heading into the third quarter of 2019, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ADI over the last 16 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

No of Hedge Funds with ADI Positions

More specifically, Cantillon Capital Management was the largest shareholder of Analog Devices, Inc. (NASDAQ:ADI), with a stake worth $574.8 million reported as of the end of March. Trailing Cantillon Capital Management was Generation Investment Management, which amassed a stake valued at $563.6 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.

As industrywide interest jumped, key money managers were leading the bulls' herd. Holocene Advisors, managed by Brandon Haley, initiated the largest position in Analog Devices, Inc. (NASDAQ:ADI). Holocene Advisors had $56.8 million invested in the company at the end of the quarter. Holocene Advisors also initiated a $46.3 million call option position during the quarter. The other funds with brand new ADI positions are Frank Slattery's Symmetry Peak Management, Israel Englander's Millennium Management, and John Overdeck and David Siegel's Two Sigma Advisors.

Let's now take a look at hedge fund activity in other stocks similar to Analog Devices, Inc. (NASDAQ:ADI). We will take a look at AFLAC Incorporated (NYSE:AFL), Keurig Dr Pepper Inc. (NYSE:KDP), Applied Materials, Inc. (NASDAQ:AMAT), and Baidu, Inc. (NASDAQ:BIDU). This group of stocks' market values are closest to ADI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AFL,23,727206,-7 KDP,21,699540,-1 AMAT,44,1996991,2 BIDU,44,1822939,-9 Average,33,1311669,-3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1312 million. That figure was $2910 million in ADI's case. Applied Materials, Inc. (NASDAQ:AMAT) is the most popular stock in this table. On the other hand Keurig Dr Pepper Inc. (NYSE:KDP) is the least popular one with only 21 bullish hedge fund positions. Analog Devices, Inc. (NASDAQ:ADI) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ADI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ADI were disappointed as the stock returned -0.5% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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