Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
STAAR Surgical Company (NASDAQ:STAA) was in 13 hedge funds’ portfolios at the end of September. STAA has experienced a decrease in hedge fund interest in recent months. There were 16 hedge funds in our database with STAA positions at the end of the previous quarter. Our calculations also showed that STAA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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 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.
Paul Marshall of Marshall Wace
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the key hedge fund action regarding STAAR Surgical Company (NASDAQ:STAA).
Hedge fund activity in STAAR Surgical Company (NASDAQ:STAA)
At Q3’s end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from the previous quarter. By comparison, 24 hedge funds held shares or bullish call options in STAA 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, Broadwood Capital was the largest shareholder of STAAR Surgical Company (NASDAQ:STAA), with a stake worth $279.5 million reported as of the end of September. Trailing Broadwood Capital was Palo Alto Investors, which amassed a stake valued at $100.3 million. Consonance Capital Management, Pura Vida Investments, and Marshall Wace 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 Broadwood Capital allocated the biggest weight to STAAR Surgical Company (NASDAQ:STAA), around 38.8% of its 13F portfolio. Palo Alto Investors is also relatively very bullish on the stock, setting aside 6.68 percent of its 13F equity portfolio to STAA.
Due to the fact that STAAR Surgical Company (NASDAQ:STAA) has experienced declining sentiment from the smart money, it’s easy to see that there were a few funds that slashed their entire stakes heading into Q4. It’s worth mentioning that James E. Flynn’s Deerfield Management dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, totaling close to $25.8 million in stock, and Renaissance Technologies was right behind this move, as the fund sold off about $5.6 million worth. These transactions are interesting, as total hedge fund interest fell by 3 funds heading into Q4.
Let’s now take a look at hedge fund activity in other stocks similar to STAAR Surgical Company (NASDAQ:STAA). These stocks are Triumph Group Inc (NYSE:TGI), World Acceptance Corporation (NASDAQ:WRLD), Health Catalyst, Inc (NASDAQ:HCAT), and Ballard Power Systems Inc. (NASDAQ:BLDP). This group of stocks’ market values resemble STAA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TGI | 13 | 63919 | 1 |
| WRLD | 14 | 167479 | 3 |
| HCAT | 13 | 45286 | 13 |
| BLDP | 6 | 3386 | 2 |
| Average | 11.5 | 70018 | 4.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $70 million. That figure was $457 million in STAA’s case. World Acceptance Corporation (NASDAQ:WRLD) is the most popular stock in this table. On the other hand Ballard Power Systems Inc. (NASDAQ:BLDP) is the least popular one with only 6 bullish hedge fund positions. STAAR Surgical Company (NASDAQ:STAA) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on STAA as the stock returned 43% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
