Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves. In this article, we look at what those funds think of BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) based on that data.
Hedge fund interest in BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare BMRN to other stocks including Lincoln National Corporation (NYSE:LNC), Masco Corporation (NYSE:MAS), and American Airlines Group Inc (NASDAQ:AAL) to get a better sense of its popularity.
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.
William Leland Edwards of Palo Alto Investors
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. With all of this in mind let’s review the recent hedge fund action surrounding BioMarin Pharmaceutical Inc. (NASDAQ:BMRN).
How have hedgies been trading BioMarin Pharmaceutical Inc. (NASDAQ:BMRN)?
At the end of the third quarter, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2019. On the other hand, there were a total of 40 hedge funds with a bullish position in BMRN a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Baker Bros. Advisors was the largest shareholder of BioMarin Pharmaceutical Inc. (NASDAQ:BMRN), with a stake worth $511.5 million reported as of the end of September. Trailing Baker Bros. Advisors was Viking Global, which amassed a stake valued at $206.1 million. venBio Select Advisor, Palo Alto Investors, and Partner Fund 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 Palo Alto Investors allocated the biggest weight to BioMarin Pharmaceutical Inc. (NASDAQ:BMRN), around 9.92% of its 13F portfolio. Copernicus Capital Management is also relatively very bullish on the stock, designating 8.53 percent of its 13F equity portfolio to BMRN.
Seeing as BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) has faced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there were a few hedge funds that elected to cut their positions entirely in the third quarter. At the top of the heap, Jacob Doft’s Highline Capital Management said goodbye to the largest investment of the “upper crust” of funds followed by Insider Monkey, valued at close to $52 million in stock. Peter Muller’s fund, PDT Partners, also said goodbye to its stock, about $25.6 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) but similarly valued. We will take a look at Lincoln National Corporation (NYSE:LNC), Masco Corporation (NYSE:MAS), American Airlines Group Inc (NASDAQ:AAL), and Lyft, Inc. (NASDAQ:LYFT). This group of stocks’ market valuations resemble BMRN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LNC | 34 | 1142033 | -1 |
| MAS | 46 | 1007912 | 1 |
| AAL | 38 | 1781432 | 4 |
| LYFT | 33 | 880680 | -4 |
| Average | 37.75 | 1203014 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 37.75 hedge funds with bullish positions and the average amount invested in these stocks was $1203 million. That figure was $1622 million in BMRN’s case. Masco Corporation (NYSE:MAS) is the most popular stock in this table. On the other hand Lyft, Inc. (NASDAQ:LYFT) is the least popular one with only 33 bullish hedge fund positions. BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 BMRN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on BMRN were disappointed as the stock returned 1% in 2019 (through December 23rd) and underperformed 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 many of these stocks already outperformed the market so far this year.
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.
