Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let’s see whether Galapagos NV (NASDAQ:GLPG) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Is Galapagos NV (NASDAQ:GLPG) the right pick for your portfolio? Hedge funds are becoming hopeful. The number of bullish hedge fund bets moved up by 1 in recent months. Our calculations also showed that GLPG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). GLPG was in 14 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 13 hedge funds in our database with GLPG positions at the end of the previous quarter.
Video: Click the image to 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 41 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.
Kris Jenner of Rock Springs Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a peek at the new hedge fund action encompassing Galapagos NV (NASDAQ:GLPG).
How have hedgies been trading Galapagos NV (NASDAQ:GLPG)?
Heading into the first quarter of 2020, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GLPG over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Rock Springs Capital Management held the most valuable stake in Galapagos NV (NASDAQ:GLPG), which was worth $36.2 million at the end of the third quarter. On the second spot was Cormorant Asset Management which amassed $20.9 million worth of shares. Arrowstreet Capital, Aquilo Capital Management, and DAFNA 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 Aquilo Capital Management allocated the biggest weight to Galapagos NV (NASDAQ:GLPG), around 5.59% of its 13F portfolio. DAFNA Capital Management is also relatively very bullish on the stock, dishing out 3.34 percent of its 13F equity portfolio to GLPG.
Now, key hedge funds were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most valuable position in Galapagos NV (NASDAQ:GLPG). Arrowstreet Capital had $16.5 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $3.1 million investment in the stock during the quarter. The other funds with brand new GLPG positions are D. E. Shaw’s D E Shaw, Parvinder Thiara’s Athanor Capital, and Mike Vranos’s Ellington.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Galapagos NV (NASDAQ:GLPG) but similarly valued. These stocks are Darden Restaurants, Inc. (NYSE:DRI), Tenaris S.A. (NYSE:TS), Atmos Energy Corporation (NYSE:ATO), and Arconic Inc. (NYSE:ARNC). This group of stocks’ market valuations match GLPG’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DRI | 33 | 730138 | 2 |
| TS | 16 | 368767 | 5 |
| ATO | 26 | 315309 | 3 |
| ARNC | 43 | 3678178 | 8 |
| Average | 29.5 | 1273098 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $1273 million. That figure was $118 million in GLPG’s case. Arconic Inc. (NYSE:ARNC) is the most popular stock in this table. On the other hand Tenaris S.A. (NYSE:TS) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Galapagos NV (NASDAQ:GLPG) is even less popular than TS. Hedge funds clearly dropped the ball on GLPG 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on GLPG as the stock returned -22.2% during the same time period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
