Did Hedge Funds Drop The Ball On MaxLinear, Inc. (MXL)?

Asma UL Husna

Fri, May 3, 2019, 6:30 PM

A market correction in the fourth quarter, spurred by a number of global macroeconomic concerns and rising interest rates ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. This is evident in the fact that the Russell 2000 ETF underperformed the S&P 500 ETF by nearly 7 percentage points during the fourth quarter. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let's study the hedge fund sentiment to see how those concerns affected their ownership of MaxLinear, Inc. (NYSE:MXL) during the quarter.

Is MaxLinear, Inc. (NYSE:MXL) going to take off soon? Prominent investors are taking a bullish view. The number of bullish hedge fund bets went up by 1 lately. Our calculations also showed that MXL isn't among the 30 most popular stocks among hedge funds.

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 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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

BlueMountain Capital Management's Returns, AUM and Holdings

Let's take a look at the recent hedge fund action encompassing MaxLinear, Inc. (NYSE:MXL).

What does the smart money think about MaxLinear, Inc. (NYSE:MXL)?

At Q4's end, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from one quarter earlier. By comparison, 5 hedge funds held shares or bullish call options in MXL a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of MaxLinear, Inc. (NYSE:MXL), with a stake worth $9.4 million reported as of the end of December. Trailing Royce & Associates was Divisar Capital, which amassed a stake valued at $8.6 million. Citadel Investment Group, Blue Mountain Capital, and Holocene Advisors were also very fond of the stock, giving the stock large weights in their portfolios.

With a general bullishness amongst the heavyweights, some big names were leading the bulls' herd. Divisar Capital, managed by Steven Baughman, created the most valuable position in MaxLinear, Inc. (NYSE:MXL). Divisar Capital had $8.6 million invested in the company at the end of the quarter. Andrew Feldstein and Stephen Siderow's Blue Mountain Capital also initiated a $0.3 million position during the quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as MaxLinear, Inc. (NYSE:MXL) but similarly valued. We will take a look at Hortonworks Inc (NASDAQ:HDP), Oxford Industries, Inc. (NYSE:OXM), Vocera Communications Inc (NYSE:VCRA), and Knowles Corp (NYSE:KN). This group of stocks' market values are similar to MXL's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HDP,20,193198,-7 OXM,9,52653,-4 VCRA,17,103411,6 KN,24,104079,12 Average,17.5,113335,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $113 million. That figure was $20 million in MXL's case. Knowles Corp (NYSE:KN) is the most popular stock in this table. On the other hand Oxford Industries, Inc. (NYSE:OXM) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks MaxLinear, Inc. (NYSE:MXL) is even less popular than OXM. Hedge funds clearly dropped the ball on MXL as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on MXL as the stock returned 56.6% and outperformed the market by an even larger margin.

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

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