Did Hedge Funds Make The Right Call On Globus Medical Inc (GMED) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Globus Medical Inc (NYSE:GMED) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Globus Medical Inc (NYSE:GMED) has experienced a decrease in enthusiasm from smart money recently. GMED was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. There were 29 hedge funds in our database with GMED holdings at the end of the previous quarter. Our calculations also showed that GMED isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to take a glance at the latest hedge fund action regarding Globus Medical Inc (NYSE:GMED).

What have hedge funds been doing with Globus Medical Inc (NYSE:GMED)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -34% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GMED over the last 18 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Globus Medical Inc (NYSE:GMED), which was worth $57.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $41.5 million worth of shares. Polar Capital, Millennium Management, and Arrowstreet Capital 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 Algert Coldiron Investors allocated the biggest weight to Globus Medical Inc (NYSE:GMED), around 0.64% of its 13F portfolio. Intrinsic Edge Capital is also relatively very bullish on the stock, setting aside 0.45 percent of its 13F equity portfolio to GMED.

Judging by the fact that Globus Medical Inc (NYSE:GMED) has experienced declining sentiment from the smart money, logic holds that there exists a select few hedge funds that slashed their entire stakes in the first quarter. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management said goodbye to the largest stake of the 750 funds monitored by Insider Monkey, comprising about $24.7 million in stock. Steve Cohen’s fund, Point72 Asset Management, also dropped its stock, about $9.1 million worth. These moves are interesting, as aggregate hedge fund interest fell by 10 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to Globus Medical Inc (NYSE:GMED). These stocks are Legg Mason, Inc. (NYSE:LM), Flex Ltd. (NASDAQ:FLEX), First Industrial Realty Trust, Inc. (NYSE:FR), and Planet Fitness Inc (NYSE:PLNT). This group of stocks’ market valuations are similar to GMED’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $691 million. That figure was $166 million in GMED’s case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Flex Ltd. (NASDAQ:FLEX) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Globus Medical Inc (NYSE:GMED) is even less popular than FLEX. Hedge funds dodged a bullet by taking a bearish stance towards GMED. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but managed to beat the market by 17.1 percentage points. Unfortunately GMED wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); GMED investors were disappointed as the stock returned 16.9% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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