How do we determine whether Tower Semiconductor Ltd. (NASDAQ:TSEM) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Is Tower Semiconductor Ltd. (NASDAQ:TSEM) a cheap investment right now? The best stock pickers are turning bullish. The number of bullish hedge fund positions moved up by 2 lately. Our calculations also showed that TSEM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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_365194" align="aligncenter" width="450"] David E. Shaw of D.E. Shaw[/caption]
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. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's take a gander at the new hedge fund action surrounding Tower Semiconductor Ltd. (NASDAQ:TSEM).
How have hedgies been trading Tower Semiconductor Ltd. (NASDAQ:TSEM)?
At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the previous quarter. By comparison, 13 hedge funds held shares or bullish call options in TSEM a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Rima Senvest Management held the most valuable stake in Tower Semiconductor Ltd. (NASDAQ:TSEM), which was worth $161.8 million at the end of the third quarter. On the second spot was D E Shaw which amassed $55.7 million worth of shares. Renaissance Technologies, Two Sigma Advisors, and Moab Capital Partners 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 Rima Senvest Management allocated the biggest weight to Tower Semiconductor Ltd. (NASDAQ:TSEM), around 13.95% of its 13F portfolio. Moab Capital Partners is also relatively very bullish on the stock, earmarking 2.33 percent of its 13F equity portfolio to TSEM.
As one would reasonably expect, key hedge funds have jumped into Tower Semiconductor Ltd. (NASDAQ:TSEM) headfirst. Wexford Capital, managed by Charles Davidson and Joseph Jacobs, assembled the most outsized position in Tower Semiconductor Ltd. (NASDAQ:TSEM). Wexford Capital had $3.6 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also made a $3.3 million investment in the stock during the quarter. The only other fund with a new position in the stock is Mark Coe's Intrinsic Edge Capital.
Let's now review hedge fund activity in other stocks similar to Tower Semiconductor Ltd. (NASDAQ:TSEM). These stocks are BEST Inc. (NYSE:BEST), DiamondRock Hospitality Company (NYSE:DRH), Commercial Metals Company (NYSE:CMC), and Diodes Incorporated (NASDAQ:DIOD). This group of stocks' market valuations are similar to TSEM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BEST,14,46733,1 DRH,16,116483,-1 CMC,17,233187,0 DIOD,21,71352,3 Average,17,116939,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $117 million. That figure was $289 million in TSEM's case. Diodes Incorporated (NASDAQ:DIOD) is the most popular stock in this table. On the other hand BEST Inc. (NYSE:BEST) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Tower Semiconductor Ltd. (NASDAQ:TSEM) is even less popular than BEST. Hedge funds clearly dropped the ball on TSEM as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on TSEM as the stock returned 13.9% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.