World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients’ money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It’s not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It’s also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.
Guardant Health, Inc. (NASDAQ:GH) has experienced an increase in support from the world’s most elite money managers of late. Our calculations also showed that GH isn’t among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let’s analyze the recent hedge fund action surrounding Guardant Health, Inc. (NASDAQ:GH).
What does smart money think about Guardant Health, Inc. (NASDAQ:GH)?
Heading into the second quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 100% from one quarter earlier. On the other hand, there were a total of 0 hedge funds with a bullish position in GH a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
The largest stake in Guardant Health, Inc. (NASDAQ:GH) was held by OrbiMed Advisors, which reported holding $117.7 million worth of stock at the end of March. It was followed by Rock Springs Capital Management with a $13.8 million position. Other investors bullish on the company included Hitchwood Capital Management, Pura Vida Investments, and Citadel Investment Group.
With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Hitchwood Capital Management, managed by James Crichton, assembled the most valuable position in Guardant Health, Inc. (NASDAQ:GH). Hitchwood Capital Management had $10 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $7.1 million position during the quarter. The other funds with new positions in the stock are Brad Farber’s Atika Capital, Anand Parekh’s Alyeska Investment Group, and David Costen Haley’s HBK Investments.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Guardant Health, Inc. (NASDAQ:GH) but similarly valued. These stocks are HubSpot Inc (NYSE:HUBS), Arrow Electronics, Inc. (NYSE:ARW), Perrigo Company plc (NYSE:PRGO), and American Campus Communities, Inc. (NYSE:ACC). This group of stocks’ market caps resemble GH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HUBS | 29 | 621767 | 7 |
| ARW | 22 | 472588 | 1 |
| PRGO | 18 | 662267 | -5 |
| ACC | 19 | 322439 | 3 |
| Average | 22 | 519765 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $520 million. That figure was $175 million in GH’s case. HubSpot Inc (NYSE:HUBS) is the most popular stock in this table. On the other hand Perrigo Company plc (NYSE:PRGO) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Guardant Health, Inc. (NASDAQ:GH) is even less popular than PRGO. Hedge funds clearly dropped the ball on GH as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on GH as the stock returned 16.7% during the same period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.