U.S. Markets closed

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

Reymerlyn Martin

"October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being '08 and the Crash of '87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the '87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March '09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher." This is how Trapeze Asset Management summarized the recent market moves in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.

Hedge fund interest in Palo Alto Networks Inc (NYSE:PANW) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Cintas Corporation (NASDAQ:CTAS), Credicorp Ltd. (NYSE:BAP), and POSCO (NYSE:PKX) to gather more data points.

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 flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Millennium Management, Catapult Capital Management

We're going to take a glance at the recent 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 fourth quarter, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2018. By comparison, 45 hedge funds held shares or bullish call options in PANW a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

PANW_mar2019

Among these funds, Renaissance Technologies held the most valuable stake in Palo Alto Networks Inc (NYSE:PANW), which was worth $810.7 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $210.3 million worth of shares. Moreover, Cadian Capital, Millennium Management, and D E Shaw were also bullish on Palo Alto Networks Inc (NYSE:PANW), allocating a large percentage of their portfolios to this stock.

Seeing as Palo Alto Networks Inc (NYSE:PANW) has faced falling interest from the aggregate hedge fund industry, we can see that there lies a certain "tier" of hedge funds who sold off their positions entirely heading into Q3. Interestingly, Sander Gerber's Hudson Bay Capital Management said goodbye to the largest stake of the "upper crust" of funds monitored by Insider Monkey, worth close to $91.7 million in stock, and D. E. Shaw's D E Shaw was right behind this move, as the fund cut about $57.3 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

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 Cintas Corporation (NASDAQ:CTAS), Credicorp Ltd. (NYSE:BAP), POSCO (NYSE:PKX), and Cheniere Energy Partners LP (NYSEAMEX:CQP). This group of stocks' market valuations match PANW's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CTAS,29,691809,-2 BAP,14,784467,-1 PKX,15,119192,1 CQP,4,14561,0 Average,15.5,402507,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $403 million. That figure was $2204 million in PANW's case. Cintas Corporation (NASDAQ:CTAS) is the most popular stock in this table. On the other hand Cheniere Energy Partners LP (NYSEAMEX:CQP) is the least popular one with only 4 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 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. Hedge funds were also right about betting on PANW as the stock returned 27.3% and outperformed the market as well.

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

Related Content