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Hedge Funds Started Dumping Palo Alto Networks (PANW) Even Before Coronavirus

Debasis Saha

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published this article and predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. With this in mind, let’s take a look at the recent hedge fund activity surrounding Palo Alto Networks Inc (NYSE:PANW).

Palo Alto Networks Inc (NYSE:PANW) shareholders have witnessed a decrease in hedge fund sentiment recently. Our calculations also showed that PANW isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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_26073" align="aligncenter" width="400"] Jim Simons of Renaissance Technologies[/caption]

RENAISSANCE TECHNOLOGIES

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Now we're going to check out the fresh hedge fund action encompassing Palo Alto Networks Inc (NYSE:PANW).

How are hedge funds trading Palo Alto Networks Inc (NYSE:PANW)?

At the end of the fourth quarter, a total of 47 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. By comparison, 46 hedge funds held shares or bullish call options in PANW a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is PANW A Good Stock To Buy?

Among these funds, Renaissance Technologies held the most valuable stake in Palo Alto Networks Inc (NYSE:PANW), which was worth $1309.4 million at the end of the third quarter. On the second spot was Farallon Capital which amassed $256.3 million worth of shares. Harvard Management Co, D E Shaw, and Cadian 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 Harvard Management Co allocated the biggest weight to Palo Alto Networks Inc (NYSE:PANW), around 21.97% of its 13F portfolio. Crosslink Capital is also relatively very bullish on the stock, setting aside 8.06 percent of its 13F equity portfolio to PANW.

Because Palo Alto Networks Inc (NYSE:PANW) has faced falling interest from the smart money, it's easy to see that there exists a select few hedgies that slashed their full holdings in the third quarter. It's worth mentioning that Doug Silverman and Alexander Klabin's Senator Investment Group dumped the largest investment of all the hedgies monitored by Insider Monkey, comprising close to $203.8 million in stock, and Robert Henry Lynch's Aristeia Capital was right behind this move, as the fund cut about $19.5 million worth. These moves are interesting, as total hedge fund interest fell by 5 funds in the third quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Palo Alto Networks Inc (NYSE:PANW) but similarly valued. We will take a look at Verisign, Inc. (NASDAQ:VRSN), Liberty Broadband Corp (NASDAQ:LBRDA), Twenty-First Century Fox Inc (NASDAQ:FOX), and McCormick & Company, Incorporated (NYSE:MKC). This group of stocks' market valuations are similar to PANW's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VRSN,38,5872682,6 LBRDA,24,821139,0 FOX,27,935717,-2 MKC,24,155508,-6 Average,28.25,1946262,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $1946 million. That figure was $3168 million in PANW's case. Verisign, Inc. (NASDAQ:VRSN) is the most popular stock in this table. On the other hand Liberty Broadband Corp (NASDAQ:LBRDA) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Palo Alto Networks Inc (NYSE:PANW) is more popular among hedge funds. 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 12.9% in 2020 through March 9th and still beat the market by 1.9 percentage points. Unfortunately PANW wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PANW were disappointed as the stock returned -31.3% during the first two months of 2020 (through March 9th) 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.

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

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