Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Retrophin Inc (NASDAQ:RTRX).
Hedge fund interest in Retrophin Inc (NASDAQ:RTRX) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Sturm, Ruger & Company (NYSE:RGR), Boise Cascade Co (NYSE:BCC), and Hess Midstream Partners LP (NYSE:HESM) to gather more data points.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Let’s analyze the recent hedge fund action regarding Retrophin Inc (NASDAQ:RTRX).
What does the smart money think about Retrophin Inc (NASDAQ:RTRX)?
At the end of the fourth quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RTRX over the last 14 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, Scopia Capital held the most valuable stake in Retrophin Inc (NASDAQ:RTRX), which was worth $133.8 million at the end of the fourth quarter. On the second spot was Consonance Capital Management which amassed $91.2 million worth of shares. Moreover, Perceptive Advisors, Broadfin Capital, and D E Shaw were also bullish on Retrophin Inc (NASDAQ:RTRX), allocating a large percentage of their portfolios to this stock.
Because Retrophin Inc (NASDAQ:RTRX) has witnessed declining sentiment from the smart money, logic holds that there exists a select few funds that elected to cut their full holdings in the third quarter. At the top of the heap, Matt Sirovich and Jeremy Mindich’s Scopia Capital said goodbye to the largest stake of the 700 funds watched by Insider Monkey, comprising close to $49.4 million in stock. Howard Marks’s fund, Oaktree Capital Management, also dropped its stock, about $12.4 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Retrophin Inc (NASDAQ:RTRX) but similarly valued. These stocks are Sturm, Ruger & Company (NYSE:RGR), Boise Cascade Co (NYSE:BCC), Hess Midstream Partners LP (NYSE:HESM), and Benchmark Electronics, Inc. (NYSE:BHE). All of these stocks’ market caps are similar to RTRX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| RGR | 14 | 85987 | 0 |
| BCC | 15 | 42385 | -7 |
| HESM | 6 | 5372 | 0 |
| BHE | 12 | 105172 | -1 |
| Average | 11.75 | 59729 | -2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $60 million. That figure was $374 million in RTRX’s case. Boise Cascade Co (NYSE:BCC) is the most popular stock in this table. On the other hand Hess Midstream Partners LP (NYSE:HESM) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Retrophin Inc (NASDAQ:RTRX) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately RTRX wasn’t nearly as popular as these 15 stock and hedge funds that were betting on RTRX were disappointed as the stock returned -12.1% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.
