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Hedge Funds Never Been This Bullish On Applied Materials, Inc. (AMAT)

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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 Applied Materials, Inc. (NASDAQ:AMAT).

Applied Materials, Inc. (NASDAQ:AMAT) was in 78 hedge funds' portfolios at the end of March. The all time high for this statistic was previously 72. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. AMAT investors should be aware of an increase in enthusiasm from smart money of late. There were 61 hedge funds in our database with AMAT positions at the end of the fourth quarter. Our calculations also showed that AMAT isn't among the 30 most popular stocks among hedge funds (click for Q1 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 115 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.

William Von Mueffling - Cantillon Capital Management
William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

At Insider Monkey we leave no stone unturned when looking for 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 hydrogen fuel cell 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. Now let's take a look at the latest hedge fund action surrounding Applied Materials, Inc. (NASDAQ:AMAT).

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

At first quarter's end, a total of 78 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 28% from the fourth quarter of 2020. Below, you can check out the change in hedge fund sentiment towards AMAT over the last 23 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

More specifically, Generation Investment Management was the largest shareholder of Applied Materials, Inc. (NASDAQ:AMAT), with a stake worth $590.9 million reported as of the end of March. Trailing Generation Investment Management was Cantillon Capital Management, which amassed a stake valued at $504.5 million. Whale Rock Capital Management, Matrix Capital 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 Albar Capital allocated the biggest weight to Applied Materials, Inc. (NASDAQ:AMAT), around 9.73% of its 13F portfolio. Abrams Bison Investments is also relatively very bullish on the stock, designating 9.49 percent of its 13F equity portfolio to AMAT.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Whale Rock Capital Management, managed by Alex Sacerdote, established the most outsized position in Applied Materials, Inc. (NASDAQ:AMAT). Whale Rock Capital Management had $403.7 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also made a $255.2 million investment in the stock during the quarter. The following funds were also among the new AMAT investors: Peter Simmie's Bristol Gate Capital Partners, Christopher Lyle's SCGE Management, and Robert Boucai's Newbrook Capital Advisors.

Let's also examine hedge fund activity in other stocks similar to Applied Materials, Inc. (NASDAQ:AMAT). We will take a look at TotalEnergies SE (NYSE:TOT), International Business Machines Corp. (NYSE:IBM), HSBC Holdings plc (NYSE:HSBC), The Toronto-Dominion Bank (NYSE:TD), Deere & Company (NYSE:DE), Raytheon Technologies Corp (NYSE:RTX), and Sea Limited (NYSE:SE). This group of stocks' market caps are similar to AMAT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TOT,17,1163601,3 IBM,41,1355701,-10 HSBC,12,234093,-2 TD,19,212935,-3 DE,51,2047270,-3 RTX,58,2497449,-1 SE,98,10433038,-17 Average,42.3,2563441,-4.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.3 hedge funds with bullish positions and the average amount invested in these stocks was $2563 million. That figure was $5711 million in AMAT's case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand HSBC Holdings plc (NYSE:HSBC) is the least popular one with only 12 bullish hedge fund positions. Applied Materials, Inc. (NASDAQ:AMAT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AMAT is 78.4. 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. 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 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 17.2% in 2021 through June 11th and beat the market again by 3.3 percentage points. Unfortunately AMAT wasn't nearly as popular as these 5 stocks and hedge funds that were betting on AMAT were disappointed as the stock returned 2.6% since the end of March (through 6/11) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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

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