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Were Hedge Funds Right About Dumping Silicon Laboratories Inc. (SLAB)?

Abigail Fisher

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 thoughtSilicon Laboratories Inc. (NASDAQ:SLAB) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Silicon Laboratories Inc. (NASDAQ:SLAB) the right investment to pursue these days? Investors who are in the know were becoming less hopeful. The number of bullish hedge fund bets retreated by 6 recently. Our calculations also showed that SLAB 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 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 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 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.

Millennium Management, Catapult Capital Management
Millennium Management, Catapult Capital Management

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's go over the new hedge fund action encompassing Silicon Laboratories Inc. (NASDAQ:SLAB).

How have hedgies been trading Silicon Laboratories Inc. (NASDAQ:SLAB)?

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in SLAB a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Silicon Laboratories Inc. (NASDAQ:SLAB) was held by Polar Capital, which reported holding $11.5 million worth of stock at the end of September. It was followed by Carlson Capital with a $9.4 million position. Other investors bullish on the company included Millennium Management, Renaissance Technologies, and G2 Investment Partners Management. In terms of the portfolio weights assigned to each position G2 Investment Partners Management allocated the biggest weight to Silicon Laboratories Inc. (NASDAQ:SLAB), around 1.67% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, designating 0.49 percent of its 13F equity portfolio to SLAB.

Seeing as Silicon Laboratories Inc. (NASDAQ:SLAB) has experienced declining sentiment from the smart money, it's safe to say that there is a sect of hedge funds that elected to cut their full holdings heading into Q4. Interestingly, John Osterweis's Osterweis Capital Management dropped the largest position of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $4.2 million in stock. Richard Driehaus's fund, Driehaus Capital, also dumped its stock, about $4 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 6 funds heading into Q4.

Let's also examine hedge fund activity in other stocks similar to Silicon Laboratories Inc. (NASDAQ:SLAB). These stocks are Deckers Outdoor Corp (NYSE:DECK), Vir Biotechnology, Inc. (NASDAQ:VIR), Jabil Inc. (NYSE:JBL), and Ritchie Bros. Auctioneers Incorporated (NYSE:RBA). This group of stocks' market caps are closest to SLAB's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DECK,31,554069,-12 VIR,4,17427,2 JBL,20,252649,-14 RBA,14,178380,-7 Average,17.25,250631,-7.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $251 million. That figure was $59 million in SLAB's case. Deckers Outdoor Corp (NYSE:DECK) is the most popular stock in this table. On the other hand Vir Biotechnology, Inc. (NASDAQ:VIR) is the least popular one with only 4 bullish hedge fund positions. Silicon Laboratories Inc. (NASDAQ:SLAB) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately SLAB wasn't nearly as popular as these 10 stocks and hedge funds that were betting on SLAB were disappointed as the stock returned 22.7% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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