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Were Hedge Funds Right About Broadcom Inc (AVGO)?

Debasis Saha
·6 min read

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtBroadcom Inc (NASDAQ:AVGO) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Broadcom Inc (NASDAQ:AVGO) a splendid investment now? Money managers were in a bearish mood. The number of bullish hedge fund positions went down by 11 recently. Our calculations also showed that AVGO isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Rajiv Jain of GQG Partners
Rajiv Jain of GQG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to view the fresh hedge fund action surrounding Broadcom Inc (NASDAQ:AVGO).

What have hedge funds been doing with Broadcom Inc (NASDAQ:AVGO)?

At Q1's end, a total of 50 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the fourth quarter of 2019. By comparison, 53 hedge funds held shares or bullish call options in AVGO a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AVGO A Good Stock To Buy?
Is AVGO A Good Stock To Buy?

Among these funds, First Pacific Advisors LLC held the most valuable stake in Broadcom Inc (NASDAQ:AVGO), which was worth $379 million at the end of the third quarter. On the second spot was Cantillon Capital Management which amassed $275.7 million worth of shares. Citadel Investment Group, Lyrical Asset Management, and AQR Capital Management 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 Bristol Gate Capital Partners allocated the biggest weight to Broadcom Inc (NASDAQ:AVGO), around 5.53% of its 13F portfolio. Crescent Park Management is also relatively very bullish on the stock, dishing out 5.49 percent of its 13F equity portfolio to AVGO.

Since Broadcom Inc (NASDAQ:AVGO) has experienced falling interest from the smart money, it's safe to say that there were a few money managers that elected to cut their full holdings by the end of the first quarter. At the top of the heap, Rajiv Jain's GQG Partners dumped the biggest stake of the 750 funds tracked by Insider Monkey, comprising about $135.6 million in stock, and Charles Clough's Clough Capital Partners was right behind this move, as the fund sold off about $34.8 million worth. These transactions are interesting, as total hedge fund interest was cut by 11 funds by the end of the first quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Broadcom Inc (NASDAQ:AVGO) but similarly valued. We will take a look at Honeywell International Inc. (NYSE:HON), Gilead Sciences, Inc. (NASDAQ:GILD), Texas Instruments Incorporated (NASDAQ:TXN), and BHP Group (NYSE:BHP). This group of stocks' market values match AVGO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HON,44,1215105,-11 GILD,76,2832662,9 TXN,46,1744576,-4 BHP,18,460616,-2 Average,46,1563240,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $1563 million. That figure was $1720 million in AVGO's case. Gilead Sciences, Inc. (NASDAQ:GILD) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 18 bullish hedge fund positions. Broadcom Inc (NASDAQ:AVGO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on AVGO as the stock returned 34.5% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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