How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Palo Alto Networks Inc (NYSE:PANW) and determine whether hedge funds had an edge regarding this stock.
Palo Alto Networks Inc (NYSE:PANW) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 47 hedge funds' portfolios at the end of March. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Rogers Communications Inc. (NYSE:RCI), Microchip Technology Incorporated (NASDAQ:MCHP), and Telefonica Brasil SA (NYSE:VIV) to gather more data points. Our calculations also showed that PANW 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.
[caption id="attachment_30570" align="aligncenter" width="400"] James Dinan of York Capital Management[/caption]
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. With all of this in mind we're going to go over the fresh hedge fund action regarding Palo Alto Networks Inc (NYSE:PANW).
What does smart money think about Palo Alto Networks Inc (NYSE:PANW)?
At Q1's end, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 44 hedge funds held shares or bullish call options in PANW 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.
Among these funds, Renaissance Technologies held the most valuable stake in Palo Alto Networks Inc (NYSE:PANW), which was worth $888.6 million at the end of the third quarter. On the second spot was Generation Investment Management which amassed $409.7 million worth of shares. Harvard Management Co, D E Shaw, and SRS Investment 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 Harvard Management Co allocated the biggest weight to Palo Alto Networks Inc (NYSE:PANW), around 30.33% of its 13F portfolio. StackLine Partners is also relatively very bullish on the stock, setting aside 6.75 percent of its 13F equity portfolio to PANW.
Seeing as Palo Alto Networks Inc (NYSE:PANW) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few hedgies that decided to sell off their positions entirely by the end of the first quarter. At the top of the heap, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali's Alta Park Capital dropped the biggest position of the 750 funds followed by Insider Monkey, worth an estimated $27 million in stock, and Baker Burleson and Stormy Scott's Banbury Partners was right behind this move, as the fund dumped about $19.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Palo Alto Networks Inc (NYSE:PANW) but similarly valued. We will take a look at Rogers Communications Inc. (NYSE:RCI), Microchip Technology Incorporated (NASDAQ:MCHP), Telefonica Brasil SA (NYSE:VIV), and Canadian Natural Resources Limited (NYSE:CNQ). This group of stocks' market valuations are similar to PANW's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RCI,16,237258,3 MCHP,38,751411,-8 VIV,8,79400,-4 CNQ,26,107018,-3 Average,22,293772,-3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $294 million. That figure was $2722 million in PANW's case. Microchip Technology Incorporated (NASDAQ:MCHP) is the most popular stock in this table. On the other hand Telefonica Brasil SA (NYSE:VIV) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Palo Alto Networks Inc (NYSE:PANW) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on PANW as the stock returned 40.1% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.