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Were Hedge Funds Right About Piling Into Teradyne, Inc. (TER)?

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In this article we will check out the progression of hedge fund sentiment towards Teradyne, Inc. (NASDAQ:TER) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Teradyne, Inc. (NASDAQ:TER) an attractive stock to buy now? Investors who are in the know were becoming more confident. The number of bullish hedge fund bets improved by 6 recently. Teradyne, Inc. (NASDAQ:TER) was in 34 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 40. Our calculations also showed that TER 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). There were 28 hedge funds in our database with TER holdings at the end of March.

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.

Charles Clough of Clough Capital Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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 we're going to take a gander at the latest hedge fund action surrounding Teradyne, Inc. (NASDAQ:TER).

What does smart money think about Teradyne, Inc. (NASDAQ:TER)?

At second quarter's end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from one quarter earlier. By comparison, 27 hedge funds held shares or bullish call options in TER a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies has the number one position in Teradyne, Inc. (NASDAQ:TER), worth close to $446.6 million, amounting to 0.4% of its total 13F portfolio. On Renaissance Technologies's heels is Alkeon Capital Management, managed by Panayotis Takis Sparaggis, which holds a $260.6 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that hold long positions comprise Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, John Overdeck and David Siegel's Two Sigma Advisors and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position Capital Growth Management allocated the biggest weight to Teradyne, Inc. (NASDAQ:TER), around 3.09% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, earmarking 2.68 percent of its 13F equity portfolio to TER.

As industrywide interest jumped, key hedge funds were leading the bulls' herd. Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, initiated the most valuable position in Teradyne, Inc. (NASDAQ:TER). Polar Capital had $64.9 million invested in the company at the end of the quarter. Ken Heebner's Capital Growth Management also made a $26.6 million investment in the stock during the quarter. The other funds with brand new TER positions are Phill Gross and Robert Atchinson's Adage Capital Management, Charles Clough's Clough Capital Partners, and Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners.

Let's check out hedge fund activity in other stocks similar to Teradyne, Inc. (NASDAQ:TER). We will take a look at Dover Corporation (NYSE:DOV), Rollins, Inc. (NYSE:ROL), International Paper Company (NYSE:IP), The Hartford Financial Services Group Inc (NYSE:HIG), Tyler Technologies, Inc. (NYSE:TYL), ONEOK, Inc. (NYSE:OKE), and Pembina Pipeline Corp (NYSE:PBA). This group of stocks' market valuations are closest to TER's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOV,40,683970,9 ROL,29,577262,4 IP,29,238219,0 HIG,39,917896,2 TYL,36,533929,6 OKE,25,117132,0 PBA,10,89252,-5 Average,29.7,451094,2.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.7 hedge funds with bullish positions and the average amount invested in these stocks was $451 million. That figure was $1354 million in TER's case. Dover Corporation (NYSE:DOV) is the most popular stock in this table. On the other hand Pembina Pipeline Corp (NYSE:PBA) is the least popular one with only 10 bullish hedge fund positions. Teradyne, Inc. (NASDAQ:TER) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TER is 75.5. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately TER wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TER were disappointed as the stock returned 4.1% since the end of June (through 10/30) 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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