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Were Hedge Funds Right About Embracing Palo Alto Networks Inc (PANW)?

Abigail Fisher
·6 min read

In this article you are going to find out whether hedge funds think Palo Alto Networks Inc (NYSE:PANW) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Palo Alto Networks Inc (NYSE:PANW) a safe stock to buy now? Prominent investors were taking a bullish view. The number of long hedge fund bets increased by 4 recently. Palo Alto Networks Inc (NYSE:PANW) was in 51 hedge funds' portfolios at the end of June. The all time high for this statistics is 52. Our calculations also showed that PANW isn't among the 30 most popular stocks among hedge funds (click for Q2 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

David Blood
David Blood

David Blood of Generation Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's check out the new hedge fund action surrounding Palo Alto Networks Inc (NYSE:PANW).

What have hedge funds been doing with Palo Alto Networks Inc (NYSE:PANW)?

At the end of the second quarter, a total of 51 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in PANW over the last 20 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, holds the number one position in Palo Alto Networks Inc (NYSE:PANW). Renaissance Technologies has a $1.1461 billion position in the stock, comprising 1% of its 13F portfolio. On Renaissance Technologies's heels is Generation Investment Management, led by David Blood and Al Gore, holding a $767 million position; 4.4% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that hold long positions comprise Karthik Sarma's SRS Investment Management, D. E. Shaw's D E Shaw and Farallon Capital. In terms of the portfolio weights assigned to each position Harvard Management Co allocated the biggest weight to Palo Alto Networks Inc (NYSE:PANW), around 17.14% of its 13F portfolio. Crosslink Capital is also relatively very bullish on the stock, earmarking 5.97 percent of its 13F equity portfolio to PANW.

With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Alta Park Capital, managed by Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali, assembled the largest position in Palo Alto Networks Inc (NYSE:PANW). Alta Park Capital had $23.7 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital also initiated a $8.8 million position during the quarter. The following funds were also among the new PANW investors: Mendel Hui's Isomer Partners, George Soros's Soros Fund Management, and Highbridge Capital Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Palo Alto Networks Inc (NYSE:PANW) but similarly valued. These stocks are Genmab A/S (NASDAQ:GMAB), Dollar Tree, Inc. (NASDAQ:DLTR), LyondellBasell Industries NV (NYSE:LYB), Equity Residential (NYSE:EQR), AvalonBay Communities Inc (NYSE:AVB), Tyson Foods, Inc. (NYSE:TSN), and Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK). All of these stocks' market caps are similar to PANW's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GMAB,15,243405,1 DLTR,60,2268495,18 LYB,32,509614,-3 EQR,33,555124,9 AVB,34,1283293,4 TSN,37,649082,-4 TLK,4,166226,-3 Average,30.7,810748,3.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.7 hedge funds with bullish positions and the average amount invested in these stocks was $811 million. That figure was $3588 million in PANW's case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK) is the least popular one with only 4 bullish hedge fund positions. Palo Alto Networks Inc (NYSE:PANW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PANW is 80.4. 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. 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately PANW wasn't nearly as popular as these 10 stocks and hedge funds that were betting on PANW were disappointed as the stock returned 3% since the end of June (through 10/23) 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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