A Multibillion-Dollar Hedge Fund Takes a Tiny Position

Tiger Global hedge fund buys into Cadence Design Systems.

Jun 8, 2014 at 4:00PM

Running a large hedge fund isn't only about grabbing stakes worth hundreds of millions of dollars in single companies. Some successful funds engage in numerous small trades that will do little to move the needle of immediate results. These investments are made for purposes of diversification or, in many cases, as tests to begin accumulating larger positions. This is a characteristic of the mammoth $12 billion fund run by Bridgewater Associates. It's also representative of the Tiger Global hedge fund, which is operated by Tiger Global Management and managed by a team headed up by Chase Coleman and Feroz Dewan.

Tiger Global's most recent "13F" disclosure filing with the SEC reveals a new position in Cadence Design Systems (NASDAQ: CDNS), a leader in the field of EDA, or electronic design automation services. The fund purchased roughly 1.1 million shares during the quarter ended March 31, at a total outlay of $17.3 million. To place the dollars in context, at the end of the first quarter of 2014, the fund's total value topped $7.3 billion, so the position in Cadence Design Systems accounted for about one-fifth of 1% of the total fund.

Cadence Design Systems is a bit more esoteric than the typical Tiger Global investment, which, as I've described previously, is often a consumer-facing technology company. CDNS provides services to the electronic devices industry, by assisting companies in the design and validation of complex integrated circuits, or ICs. As electronic devices and their components become ever smaller and more prevalent, semiconductor foundries need increasingly sophisticated design software to manufacture ICs. Cadence Design Systems fills this niche service.

How specialized is this niche? In the company's own words:

With migration to advanced process nodes, the industry must adapt to more complex physics and manufacturing challenges such as the need to draw features on silicon that are many times smaller than the wavelength of light used to draw the features via lithography.

That's pretty small. CDNS provides software, hardware, and support to companies that are designing in the semiconductor industry's current scale, which is measured in nanometers.

While we're on the topic of small, with a market capitalization of just under $5 billion and trailing-12-month revenues of $1.5 billion, CDNS is a relatively diminutive company. But revenues are growing appreciably -- the company has posted a 13.2% compounded annual growth rate, or CAGR, over the past three years. It also enjoys a fairly solid financial position: While current assets of $1.2 billion barely cover current liabilities of $1.15 billion, Cadence has no long-term debt, and only $124 million of long-term liabilities. The company is also shoring up profitability: After a loss year as recently as 2010, it's been profitable each year since and posted an 11% profit margin before income taxes in 2013.

Revenue growth has been supported by acquisitions, including the purchase of Jasper Design Automation, a leader in an area of design verification known as "formal analysis," in April of this year, for $170 million in cash. The company has tended to use its strong cash flow to acquire smaller companies, selectively adding to its portfolio of design products.

The market has applauded both the revenue growth and profit. Cadence's stock has risen appreciably over the past few years: 

CDNS Chart

CDNS data by YCharts

While priced at nearly 43 times trailing-12-month earnings, Tiger Global evidently believes that Cadence Systems has further to climb. Though it's enjoyed a healthy stock price increase of more than 21% year to date, CDNS lags both the S&P 500 and Nasdaq 100 over a trailing-12-month period, gaining just 14%, versus the S&P 500's 20% gain and the Nasdaq 100's 28% rise.

So why is Tiger Global hedge fund taking such a tiny bite out of a tiny company? While it's in some measure fruitless to guess the rationale behind large hedge funds' trades from quarter to quarter, and you certainly shouldn't base your own investment decisions solely off 13F filings, it's fun to try to read the tea leaves nonetheless.

The fund's entry into CDNS has the appearance of a first bite of what may grow into a more significant position over time. CDNS devotes a significant portion of its budget to research and development: Last year's R&D spend topped $534 million, versus revenue of $1.5 billion. Thus, nearly $0.36 of every dollar in sales is plowed back into R&D. Management appears to be executing on this spend, as new products are being rolled out at a fairly aggressive clip. This is true of both the company's core EDA focus, and the sale of verification and design intellectual property ("verification IP" and "design IP"), as CEO Lip-Bu Tan highlighted in the company's most recent earnings call with analysts.

Tiger Global may be waiting to gauge the success of new offerings on revenue, while snapping up more shares over the next few quarters. We'll sift through the fund's filings next quarter to see if it's expanded its initial foray into this intriguing electronics company.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers