How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Texas Instruments Incorporated (NASDAQ:TXN).
Hedge fund interest in Texas Instruments Incorporated (NASDAQ:TXN) shares was flat at the end of last quarter. Hedge funds didn't change their bullish stance towards TXN. Our calculations also showed that TXN isn't among the 30 most popular stocks among hedge funds (see the video below). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Rio Tinto plc (NYSE:RIO), Toronto-Dominion Bank (NYSE:TD), and American Express Company (NYSE:AXP) to gather more data points. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
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. We're going to check out the recent hedge fund action encompassing Texas Instruments Incorporated (NASDAQ:TXN).
How have hedgies been trading Texas Instruments Incorporated (NASDAQ:TXN)?
At the end of the second quarter, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TXN over the last 16 quarters. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
Among these funds, Generation Investment Management held the most valuable stake in Texas Instruments Incorporated (NASDAQ:TXN), which was worth $664.7 million at the end of the second quarter. On the second spot was AQR Capital Management which amassed $315.7 million worth of shares. Moreover, Diamond Hill Capital, Lansdowne Partners, and Citadel Investment Group were also bullish on Texas Instruments Incorporated (NASDAQ:TXN), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Texas Instruments Incorporated (NASDAQ:TXN) has experienced a decline in interest from the smart money, it's easy to see that there was a specific group of fund managers that decided to sell off their full holdings last quarter. At the top of the heap, Sander Gerber's Hudson Bay Capital Management sold off the largest investment of all the hedgies watched by Insider Monkey, worth close to $58.3 million in call options. Steve Cohen's fund, Point72 Asset Management, also sold off its call options, about $53 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Texas Instruments Incorporated (NASDAQ:TXN) but similarly valued. We will take a look at Rio Tinto Group (NYSE:RIO), Toronto-Dominion Bank (NYSE:TD), American Express Company (NYSE:AXP), and Lockheed Martin Corporation (NYSE:LMT). 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 RIO,24,1913982,2 TD,18,648247,0 AXP,45,22025448,-12 LMT,48,1348962,13 Average,33.75,6484160,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $6484 million. That figure was $2047 million in TXN's case. Lockheed Martin Corporation (NYSE:LMT) is the most popular stock in this table. On the other hand Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 18 bullish hedge fund positions. Texas Instruments Incorporated (NASDAQ:TXN) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on TXN as the stock returned 13.3% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.