“Index Effects” Do Not Disappoint Its Believers; This is What Hedge Funds Have to Say about S&P 500’s New Addition

Joy Global Inc. (NYSE:JOY), which is currently part of the S&P 500 “family”, is set to take the place of Thoratec Corporation (NASDAQ:THOR) in the S&P MidCap 400 after the close of the trading session on October 7. The latter was acquired by St. Jude Medical Inc. (NYSE:STJ) for $3.4 billion in cash earlier this year, a deal is anticipated to be completed around the same date. Most importantly, Verisk Analytics Inc. (NASDAQ:VRSK) will replace Joy’s place in the S&P 500 instead. The deletion of Joy Global was reasoned that the market capitalization of the manufacturer of mining equipment is more characteristic of the mid-cap market space. It is worth pointing out that research has provided evidence that index additions or deletions might provide great opportunities for investors, so the following article will discuss hedge fund sentiment in order to see what top money managers think of the aforementioned companies.

Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 118% over the last 36 months and outperformed the S&P 500 Index by 60 percentage points (see more details here).

Let’s begin our discussion with Joy Global Inc. (NYSE:JOY), soon-to-be deleted from the S&P 500 Index. The hedge fund sentiment on the stock did not change significantly during the second quarter, as the number of investors with positions in Joy Global decreased to 19 from 20 quarter-over-quarter. The top money managers observed by Insider Monkey amassed 11.50% of the company’s outstanding shares as of June 30. Similarly, the value of the positions decreased to $405.73 million from $424.71 million during the three-month period. However, it is hard to ignore the recent heavy insider buying activity at Joy Global. Director Paul Eric Siegert acquired 25,000 shares at prices ranging from $14.77 to $14.84 this Wednesday, boosting his stake to 68,072 shares. Even so, the shares of the manufacturer of mining equipment have lost nearly 68% since the beginning of the year, mainly owning to the challenging end-market environment that was affected by low commodity prices. Ken Griffin’s Citadel Investment Group holds an ownership stake of 2.44 million shares in Joy Global Inc. (NYSE:JOY) as of June 30.

We can now take a look at Verisk Analytics Inc. (NASDAQ:VRSK), the freshly addition to the S&P 500. The data analytics and risk assessment firm received more attention from the hedge fund industry during the second quarter, as the number of investors who poured money into the stock increased to 37 from 29. The hedge fund firms monitored by our team collectively owned 8.0% of the company’s shares at the end of June. Moreover, the value of their stakes in Verisk Analytics uplifted to $933.74 million from $616.23 million. The shares of Verisk Analytics have had a relatively strong year thus far, delivering a return of more than 15% year-to-date. Even more to that, the stock has advanced by over 4% in today’s trading session on the back of the news. Israel Englander’s Millennium Management significantly boosted its position in Verisk Analytics Inc. (NASDAQ:VRSK) during the second quarter to 774,000 shares.

Finally, we will discuss the recent deal between Thoratec Corporation (NASDAQ:THOR) and St. Jude Medical Inc. (NYSE:STJ), which stands behind the latest developments. St. Jude’s move represents an attempt to tackle and step over its sluggish revenue growth. Thoratec is a leading manufacturer of medical devices that are used for mechanical circulatory support for the treatment of heart failure patients, so St. Jude intends to penetrate a very promising market considering that roughly 6 million people in the U.S. suffer from heart failure. Meanwhile, David Stemerman’s Conatus Capital Management represents one of the largest shareholders in St. Jude Medical Inc. (NYSE:STJ) among the hedge funds observed by the Insider Monkey team, holding 1.38 million shares.

Disclosure: None