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Were Hedge Funds Right About Souring On TE Connectivity Ltd. (TEL)?

Reymerlyn Martin

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ a complex analysis to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space.

Is TE Connectivity Ltd. (NYSE:TEL) undervalued? The best stock pickers are getting less optimistic. The number of long hedge fund positions shrunk by 5 lately. Our calculations also showed that TEL isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Michael Platt BlueCrest Capital

Let's take a gander at the recent hedge fund action regarding TE Connectivity Ltd. (NYSE:TEL).

How are hedge funds trading TE Connectivity Ltd. (NYSE:TEL)?

At the end of the fourth quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards TEL over the last 14 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

TEL_mar2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Generation Investment Management, managed by David Blood and Al Gore, holds the number one position in TE Connectivity Ltd. (NYSE:TEL). Generation Investment Management has a $343.4 million position in the stock, comprising 2.9% of its 13F portfolio. On Generation Investment Management's heels is First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, which holds a $336.1 million position; the fund has 3.2% of its 13F portfolio invested in the stock. Some other members of the smart money that hold long positions include John Overdeck and David Siegel's Two Sigma Advisors, Cliff Asness's AQR Capital Management and Ian Simm's Impax Asset Management.

Seeing as TE Connectivity Ltd. (NYSE:TEL) has experienced a decline in interest from the entirety of the hedge funds we track, we can see that there exists a select few hedgies who were dropping their entire stakes last quarter. At the top of the heap, Phill Gross and Robert Atchinson's Adage Capital Management dropped the largest stake of the "upper crust" of funds followed by Insider Monkey, totaling an estimated $37.4 million in stock, and David Costen Haley's HBK Investments was right behind this move, as the fund dumped about $6.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 5 funds last quarter.

Let's check out hedge fund activity in other stocks similar to TE Connectivity Ltd. (NYSE:TEL). These stocks are Xcel Energy Inc (NASDAQ:XEL), Canadian Pacific Railway Limited (NYSE:CP), Sirius XM Holdings Inc (NASDAQ:SIRI), and Pinduoduo Inc. (NASDAQ:PDD). This group of stocks' market values match TEL's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XEL,21,559185,0 CP,40,2102902,10 SIRI,21,1145420,-3 PDD,20,180528,-1 Average,25.5,997009,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $997 million. That figure was $1265 million in TEL's case. Canadian Pacific Railway Limited (NYSE:CP) is the most popular stock in this table. On the other hand Pinduoduo Inc. (NASDAQ:PDD) is the least popular one with only 20 bullish hedge fund positions. TE Connectivity Ltd. (NYSE:TEL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately TEL wasn't in this group. Hedge funds that bet on TEL were disappointed as the stock returned 11.2% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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