Madison Funds, an investment management firm, has released its third quarter 2021 Madison Small Cap Fund letter to investors – a copy of which can be downloaded here. The Madison Small Cap Fund Class Y lost 4.70%, slightly underperforming the Russell 2000 by 34 basis points (bps) in the third quarter of 2021, while the Russell 2000 index was down 4.36% to the same period. You can check out the top 5 holdings in the fund to get a feel for their top picks for 2021.
Madison Funds, in its letter to investors for the third quarter of 2021, mentioned Power Integrations, Inc. (NASDAQ: POWI) and discussed his position on the company. Power Integrations, Inc. is a San Jose, California-based semiconductor manufacturing company with a market capitalization of $ 6 billion. POWI has achieved a 22.89% year-to-date return, while its 12-month returns are up 65.13%. The stock closed at $ 99.49 per share on October 20, 2021.
Here’s what Madison Funds has to say about Power Integrations, Inc. in its Q3 2021 letter to investors:
âFinally, our technology stocks continue to generate positive excess returns. One of our most recent positions generated the lion’s share of these returns: manufacturer of analog power semiconductors, Power integrations (POWI). This is a company that we have owned successfully in the past, and we would like to take a moment to discuss this great franchise and our investment thesis. POWI has one of the strongest intellectual property (IP) portfolios in the analog power semiconductor subsector. They have successfully defended their intellectual property against several large companies and feature high operating margins (25%), returns on invested capital, and a cash-rich, debt-free balance sheet. POWI management is highly regarded with a successful track record of execution and capital deployment. Energy efficiency is one of the most important topics in technology. Devices ranging from handset chargers to laptops to electric vehicles require greater and faster power management, and POWI’s solutions offer some of the most compelling in terms of size and efficiency. Their integrated solutions take up less space and offer faster and more efficient power management attributes. POWI reported solid results demonstrating share gains and validating our thesis. We believe this is a very strategic franchise and has years of growth opportunities to come. “
Photo by Yogesh Phuyal on Unsplash
Based on our calculations, Power Integrations, Inc. (NASDAQ: POWI) failed to land a spot on our list of the 30 most popular stocks among hedge funds. PWI was in 21 hedge fund portfolios at the end of the first half of 2021, compared to 18 funds in the previous quarter. Power Integrations, Inc. (NASDAQ: POWI) generated a return of 22.44% in the last 3 months.
The reputation of hedge funds as savvy investors has been tarnished over the past decade, as their hedged returns could not keep up with the unhedged returns of stock indexes. Our research has shown that small cap hedge fund stock selection managed to beat the market by double digits every year between 1999 and 2016, but the margin for outperformance has shrunk in recent years. Nonetheless, we were still able to identify in advance a select group of hedge funds that have outperformed S&P 500 ETFs by 115 percentage points since March 2017 (see details here). We were also able to identify in advance a select group of hedge funds that underperformed the market by 10 percentage points per year between 2006 and 2017. Interestingly, the margin of underperformance of these stocks has increased in recent years. Investors who are long in the market and short on these stocks would have reported more than 27% per year between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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