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Were Hedge Funds Right About Analog Devices, Inc. (ADI)?

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  • ADI

In this article we will take a look at whether hedge funds think Analog Devices, Inc. (NASDAQ:ADI) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Analog Devices, Inc. (NASDAQ:ADI) the right investment to pursue these days? Money managers were getting more bullish. The number of bullish hedge fund positions moved up by 12 lately. Analog Devices, Inc. (NASDAQ:ADI) was in 62 hedge funds' portfolios at the end of June. The all time high for this statistic was previously 58. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ADI isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 50 hedge funds in our database with ADI positions at the end of the first quarter.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 79 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.

Eric Mandelblatt Soroban Capital Partners
Eric Mandelblatt Soroban Capital Partners

Eric Mandelblatt of Soroban Capital Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let's take a look at the key hedge fund action surrounding Analog Devices, Inc. (NASDAQ:ADI).

Do Hedge Funds Think ADI Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 62 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from the previous quarter. By comparison, 49 hedge funds held shares or bullish call options in ADI 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.

The largest stake in Analog Devices, Inc. (NASDAQ:ADI) was held by Generation Investment Management, which reported holding $835.8 million worth of stock at the end of June. It was followed by Cantillon Capital Management with a $596.2 million position. Other investors bullish on the company included Soroban Capital Partners, Citadel Investment Group, and First Pacific Advisors LLC. In terms of the portfolio weights assigned to each position Albar Capital allocated the biggest weight to Analog Devices, Inc. (NASDAQ:ADI), around 8.16% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, dishing out 7.38 percent of its 13F equity portfolio to ADI.

Consequently, specific money managers have been driving this bullishness. Renaissance Technologies, initiated the most outsized position in Analog Devices, Inc. (NASDAQ:ADI). Renaissance Technologies had $101.4 million invested in the company at the end of the quarter. Aaron Cowen's Suvretta Capital Management also made a $53.7 million investment in the stock during the quarter. The following funds were also among the new ADI investors: Paul Marshall and Ian Wace's Marshall Wace LLP, Javier Velazquez's Albar Capital, and Ray Dalio's Bridgewater Associates.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Analog Devices, Inc. (NASDAQ:ADI) but similarly valued. We will take a look at Stellantis N.V. (NYSE:STLA), Banco Santander (Brasil) SA (NYSE:BSBR), Roku, Inc. (NASDAQ:ROKU), Boston Scientific Corporation (NYSE:BSX), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Dominion Energy Inc. (NYSE:D), and Ford Motor Company (NYSE:F). This group of stocks' market caps resemble ADI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STLA,28,844328,7 BSBR,7,9630,2 ROKU,61,5631958,-2 BSX,51,3029136,7 REGN,48,1595301,9 D,34,1262051,-5 F,55,2106196,6 Average,40.6,2068371,3.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.6 hedge funds with bullish positions and the average amount invested in these stocks was $2068 million. That figure was $5796 million in ADI's case. Roku, Inc. (NASDAQ:ROKU) is the most popular stock in this table. On the other hand Banco Santander (Brasil) SA (NYSE:BSBR) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Analog Devices, Inc. (NASDAQ:ADI) is more popular among hedge funds. Our overall hedge fund sentiment score for ADI is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 26.3% in 2021 through October 29th and still beat the market by 2.3 percentage points. Unfortunately ADI wasn't nearly as popular as these 5 stocks and hedge funds that were betting on ADI were disappointed as the stock returned 1.2% since the end of the second quarter (through 10/29) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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