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Hedge Funds Soured On Broadcom Inc (AVGO)

Abigail Fisher

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds' and investors' portfolio positions as of March 31st, near the height of the coronavirus market crash. In this article, we look at what those funds think of Broadcom Inc (NASDAQ:AVGO) based on that data.

Is Broadcom Inc (NASDAQ:AVGO) a superb investment today? Investors who are in the know are getting less optimistic. The number of bullish hedge fund positions fell by 11 recently. Our calculations also showed that AVGO 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.

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 S&P 500 ETFs by more than 44 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. 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_681361" align="aligncenter" width="399"] Glen Kacher of Light Street Capital[/caption]

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this successful trader’s “corona catalyst plays“. Also, Europe is set to become the world’s largest cannabis market, so we checked out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to view the recent hedge fund action encompassing Broadcom Inc (NASDAQ:AVGO).

What have hedge funds been doing with Broadcom Inc (NASDAQ:AVGO)?

Heading into the second quarter of 2020, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the previous quarter. On the other hand, there were a total of 53 hedge funds with a bullish position in AVGO 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.

Of the funds tracked by Insider Monkey, First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, holds the biggest position in Broadcom Inc (NASDAQ:AVGO). First Pacific Advisors LLC has a $379 million position in the stock, comprising 5.3% of its 13F portfolio. The second most bullish fund manager is Cantillon Capital Management, led by William von Mueffling, holding a $275.7 million position; 3% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions encompass Ken Griffin's Citadel Investment Group, Andrew Wellington and Jeff Keswin's Lyrical Asset Management and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to Broadcom Inc (NASDAQ:AVGO), around 5.53% of its 13F portfolio. Crescent Park Management is also relatively very bullish on the stock, dishing out 5.49 percent of its 13F equity portfolio to AVGO.

Judging by the fact that Broadcom Inc (NASDAQ:AVGO) has experienced falling interest from hedge fund managers, it's safe to say that there is a sect of hedge funds who sold off their entire stakes by the end of the third quarter. Interestingly, Rajiv Jain's GQG Partners dropped the biggest position of the "upper crust" of funds monitored by Insider Monkey, totaling about $135.6 million in stock, and Charles Clough's Clough Capital Partners was right behind this move, as the fund dropped about $34.8 million worth. These moves are interesting, as total hedge fund interest fell by 11 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks similar to Broadcom Inc (NASDAQ:AVGO). We will take a look at Honeywell International Inc. (NYSE:HON), Gilead Sciences, Inc. (NASDAQ:GILD), Texas Instruments Incorporated (NASDAQ:TXN), and BHP Group (NYSE:BHP). All of these stocks' market caps are similar to AVGO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HON,44,1215105,-11 GILD,76,2832662,9 TXN,46,1744576,-4 BHP,18,460616,-2 Average,46,1563240,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $1563 million. That figure was $1720 million in AVGO's case. Gilead Sciences, Inc. (NASDAQ:GILD) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 18 bullish hedge fund positions. Broadcom Inc (NASDAQ:AVGO) is not the most popular stock in this group but hedge fund interest is still above average. 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 7.9% in 2020 through May 22nd but still beat the market by 15.6 percentage points. Hedge funds were also right about betting on AVGO, though not to the same extent, as the stock returned 16.7% during the first two months of the second quarter (through May 22nd) and outperformed the market as well.

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

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