Did Hedge Funds Make The Right Call On Varex Imaging Corporation (VREX) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Varex Imaging Corporation (NASDAQ:VREX) and determine whether hedge funds skillfully traded this stock.

Varex Imaging Corporation (NASDAQ:VREX) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Construction Partners, Inc. (NASDAQ:ROAD), Cactus, Inc. (NYSE:WHD), and Office Depot Inc (NASDAQ:ODP) to gather more data points. Our calculations also showed that VREX 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Charles Davidson of Wexford Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. Keeping this in mind we’re going to review the fresh hedge fund action surrounding Varex Imaging Corporation (NASDAQ:VREX).

What does smart money think about Varex Imaging Corporation (NASDAQ:VREX)?

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 0% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in VREX a year ago. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Among these funds, Pzena Investment Management held the most valuable stake in Varex Imaging Corporation (NASDAQ:VREX), which was worth $29.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $8.3 million worth of shares. Royce & Associates, D E Shaw, and Rutabaga Capital 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 Rutabaga Capital Management allocated the biggest weight to Varex Imaging Corporation (NASDAQ:VREX), around 3.6% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, earmarking 0.34 percent of its 13F equity portfolio to VREX.

Because Varex Imaging Corporation (NASDAQ:VREX) has faced a decline in interest from hedge fund managers, it’s safe to say that there were a few hedgies that elected to cut their positions entirely by the end of the first quarter. It’s worth mentioning that Israel Englander’s Millennium Management sold off the biggest position of the 750 funds monitored by Insider Monkey, valued at about $1.2 million in stock, and Andre F. Perold’s HighVista Strategies was right behind this move, as the fund dropped about $0.6 million worth. These transactions are intriguing to say the least, 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 Varex Imaging Corporation (NASDAQ:VREX) but similarly valued. These stocks are Construction Partners, Inc. (NASDAQ:ROAD), Cactus, Inc. (NYSE:WHD), Office Depot Inc (NASDAQ:ODP), and Scholastic Corp (NASDAQ:SCHL). This group of stocks’ market valuations are closest to VREX’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $68 million in VREX’s case. Cactus, Inc. (NYSE:WHD) is the most popular stock in this table. On the other hand Construction Partners, Inc. (NASDAQ:ROAD) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Varex Imaging Corporation (NASDAQ:VREX) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds 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 and still beat the market by 17.1 percentage points. Unfortunately VREX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VREX were disappointed as the stock returned -28.6% since the end of the first quarter 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 in 2020.

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