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Were Hedge Funds Right About Warming Up To Teradyne, Inc. (TER)?

Abigail Fisher

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Teradyne, Inc. (NASDAQ:TER) investors should be aware of an increase in support from the world's most elite money managers of late. Our calculations also showed that TER isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_221556" align="aligncenter" width="450"] Richard Driehaus of Driehaus Capital[/caption]

Richard Driehaus of Driehaus Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to check out the latest hedge fund action surrounding Teradyne, Inc. (NASDAQ:TER).

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

At Q3's end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TER over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

TER_dec2019

More specifically, Renaissance Technologies was the largest shareholder of Teradyne, Inc. (NASDAQ:TER), with a stake worth $321.9 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $142.4 million. Two Sigma Advisors, Arrowstreet Capital, and Alkeon Capital 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 Sandler Capital Management allocated the biggest weight to Teradyne, Inc. (NASDAQ:TER), around 0.84% of its portfolio. PDT Partners is also relatively very bullish on the stock, dishing out 0.66 percent of its 13F equity portfolio to TER.

Consequently, key money managers were leading the bulls' herd. D E Shaw, managed by David E. Shaw, created the most valuable call position in Teradyne, Inc. (NASDAQ:TER). D E Shaw had $4.8 million invested in the company at the end of the quarter. Frank Slattery's Symmetry Peak Management also initiated a $1.7 million position during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace's Marshall Wace, Mike Vranos's Ellington, and Richard Driehaus's Driehaus Capital.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Teradyne, Inc. (NASDAQ:TER) but similarly valued. We will take a look at Datadog, Inc. (NASDAQ:DDOG), The Western Union Company (NYSE:WU), Autohome Inc (NYSE:ATHM), and Chewy, Inc. (NYSE:CHWY). This group of stocks' market values are similar to TER's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DDOG,39,208582,39 WU,20,413091,-3 ATHM,10,1157371,-6 CHWY,24,477781,-14 Average,23.25,564206,4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $564 million. That figure was $1129 million in TER's case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand Autohome Inc (NYSE:ATHM) 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 calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on TER, though not to the same extent, as the stock returned 8.2% during the first two months of the fourth quarter and outperformed the market as well.

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

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