We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Tower Semiconductor Ltd. (NASDAQ:TSEM) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Tower Semiconductor Ltd. (NASDAQ:TSEM) investors should pay attention to an increase in enthusiasm from smart money lately. Our calculations also showed that TSEM isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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_365194" align="aligncenter" width="400"] David E. Shaw of D.E. Shaw[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind we're going to take a look at the key hedge fund action encompassing Tower Semiconductor Ltd. (NASDAQ:TSEM).
What have hedge funds been doing with Tower Semiconductor Ltd. (NASDAQ:TSEM)?
At Q4's end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in TSEM a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
The largest stake in Tower Semiconductor Ltd. (NASDAQ:TSEM) was held by Rima Senvest Management, which reported holding $202 million worth of stock at the end of September. It was followed by D E Shaw with a $58.2 million position. Other investors bullish on the company included Renaissance Technologies, Shelter Haven Capital Management, and Parsifal Capital Management. In terms of the portfolio weights assigned to each position Shelter Haven Capital Management allocated the biggest weight to Tower Semiconductor Ltd. (NASDAQ:TSEM), around 18.65% of its 13F portfolio. Rima Senvest Management is also relatively very bullish on the stock, designating 13.74 percent of its 13F equity portfolio to TSEM.
With a general bullishness amongst the heavyweights, some big names were leading the bulls' herd. Shelter Haven Capital Management, managed by Jerry Kochanski, initiated the most valuable position in Tower Semiconductor Ltd. (NASDAQ:TSEM). Shelter Haven Capital Management had $39 million invested in the company at the end of the quarter. David Zorub's Parsifal Capital Management also made a $36.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Richard Driehaus's Driehaus Capital, Dmitry Balyasny's Balyasny Asset Management, and Kevin Cottrell and Chris LaSusa's KCL Capital.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Tower Semiconductor Ltd. (NASDAQ:TSEM) but similarly valued. We will take a look at WesBanco, Inc. (NASDAQ:WSBC), National Vision Holdings, Inc. (NASDAQ:EYE), Endava plc (NYSE:DAVA), and Lattice Semiconductor Corporation (NASDAQ:LSCC). This group of stocks' market valuations are closest to TSEM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WSBC,11,56936,0 EYE,15,387263,-10 DAVA,7,59418,2 LSCC,32,281293,5 Average,16.25,196228,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $196 million. That figure was $432 million in TSEM's case. Lattice Semiconductor Corporation (NASDAQ:LSCC) is the most popular stock in this table. On the other hand Endava plc (NYSE:DAVA) is the least popular one with only 7 bullish hedge fund positions. Tower Semiconductor Ltd. (NASDAQ:TSEM) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately TSEM wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TSEM investors were disappointed as the stock returned -36.3% during the same time period 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 most of these stocks already outperformed the market in Q1. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.