It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Baxter International Inc. (NYSE:BAX).
Baxter International Inc. (NYSE:BAX) shareholders have witnessed a decrease in support from the world’s most elite money managers lately. Our calculations also showed that BAX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.
Dan Loeb of Third Point
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now let’s take a look at the key hedge fund action surrounding Baxter International Inc. (NYSE:BAX).
What does smart money think about Baxter International Inc. (NYSE:BAX)?
At Q3’s end, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the previous quarter. On the other hand, there were a total of 43 hedge funds with a bullish position in BAX a year ago. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
More specifically, Third Point was the largest shareholder of Baxter International Inc. (NYSE:BAX), with a stake worth $1473.9 million reported as of the end of September. Trailing Third Point was AQR Capital Management, which amassed a stake valued at $271.7 million. Two Sigma Advisors, Healthcor Management, and Citadel Investment Group 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 Third Point allocated the biggest weight to Baxter International Inc. (NYSE:BAX), around 17.51% of its 13F portfolio. Healthcor Management is also relatively very bullish on the stock, dishing out 3.41 percent of its 13F equity portfolio to BAX.
Since Baxter International Inc. (NYSE:BAX) has faced falling interest from the entirety of the hedge funds we track, we can see that there is a sect of money managers that elected to cut their entire stakes heading into Q4. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management dropped the largest investment of all the hedgies tracked by Insider Monkey, worth an estimated $99.1 million in stock, and Larry Robbins’s Glenview Capital was right behind this move, as the fund said goodbye to about $17.4 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 1 funds heading into Q4.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Baxter International Inc. (NYSE:BAX) but similarly valued. We will take a look at Las Vegas Sands Corp. (NYSE:LVS), Metlife Inc (NYSE:MET), BCE Inc. (NYSE:BCE), and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). This group of stocks’ market values are similar to BAX’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LVS | 39 | 1983338 | 0 |
| MET | 35 | 2050364 | 9 |
| BCE | 13 | 415810 | -1 |
| VRTX | 46 | 2296101 | 6 |
| Average | 33.25 | 1686403 | 3.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $1686 million. That figure was $2445 million in BAX’s case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 13 bullish hedge fund positions. Baxter International Inc. (NYSE:BAX) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately BAX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BAX investors were disappointed as the stock returned 29.8% in 2019 (as of 12/23) and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 65 percent of these stocks already outperformed the market in 2019.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
