The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May and August as this time China pivoted and Trump put more pressure on China by increasing tariffs. Fourth quarter brought optimism to the markets and hedge funds' top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 34.7% through November 22nd, vs. a gain of 26.2% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Texas Instruments Incorporated (NASDAQ:TXN), and what that likely means for the prospects of the company and its stock.
Texas Instruments Incorporated (NASDAQ:TXN) was in 52 hedge funds' portfolios at the end of the third quarter of 2019. TXN has experienced an increase in enthusiasm from smart money in recent months. There were 43 hedge funds in our database with TXN positions at the end of the previous quarter. Our calculations also showed that TXN isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_189672" align="aligncenter" width="450"] David Blood of Generation Investment Management[/caption]
Let's review the fresh hedge fund action regarding Texas Instruments Incorporated (NASDAQ:TXN).
What does smart money think about Texas Instruments Incorporated (NASDAQ:TXN)?
At Q3's end, a total of 52 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TXN over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Generation Investment Management was the largest shareholder of Texas Instruments Incorporated (NASDAQ:TXN), with a stake worth $708.7 million reported as of the end of September. Trailing Generation Investment Management was AQR Capital Management, which amassed a stake valued at $462 million. Diamond Hill Capital, Lansdowne Partners, and Adage Capital Management 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 Cavalry Asset Management allocated the biggest weight to Texas Instruments Incorporated (NASDAQ:TXN), around 6.39% of its portfolio. Generation Investment Management is also relatively very bullish on the stock, earmarking 5 percent of its 13F equity portfolio to TXN.
As aggregate interest increased, specific money managers were breaking ground themselves. Two Sigma Advisors, managed by John Overdeck and David Siegel, assembled the most valuable position in Texas Instruments Incorporated (NASDAQ:TXN). Two Sigma Advisors had $10.8 million invested in the company at the end of the quarter. Ernest Chow and Jonathan Howe's Sensato Capital Management also made a $7.4 million investment in the stock during the quarter. The following funds were also among the new TXN investors: Jeffrey Talpins's Element Capital Management, Gavin Saitowitz and Cisco J. del Valle's Springbok Capital, and Dipak Patel's Alight Capital.
Let's go over hedge fund activity in other stocks similar to Texas Instruments Incorporated (NASDAQ:TXN). These stocks are Philip Morris International Inc. (NYSE:PM), United Technologies Corporation (NYSE:UTX), Netflix, Inc. (NASDAQ:NFLX), and AstraZeneca plc (NYSE:AZN). This group of stocks' market valuations are similar to TXN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PM,53,3693236,14 UTX,68,6458342,3 NFLX,95,8996171,-11 AZN,25,1779111,1 Average,60.25,5231715,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 60.25 hedge funds with bullish positions and the average amount invested in these stocks was $5232 million. That figure was $2579 million in TXN's case. Netflix, Inc. (NASDAQ:NFLX) is the most popular stock in this table. On the other hand AstraZeneca plc (NYSE:AZN) is the least popular one with only 25 bullish hedge fund positions. Texas Instruments Incorporated (NASDAQ:TXN) 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 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately TXN wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TXN investors were disappointed as the stock returned -8.8% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.