Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first quarter, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first quarter still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Allergan plc (NYSE:AGN) changed recently.
Allergan plc (NYSE:AGN) was in 53 hedge funds’ portfolios at the end of the first quarter of 2019. AGN shareholders have witnessed a decrease in hedge fund sentiment in recent months. There were 61 hedge funds in our database with AGN holdings at the end of the previous quarter. Our calculations also showed that AGN isn’t among the 30 most popular stocks among hedge funds.
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 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.
Let’s check out the fresh hedge fund action regarding Allergan plc (NYSE:AGN).
What does the smart money think about Allergan plc (NYSE:AGN)?
Heading into the second quarter of 2019, a total of 53 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AGN over the last 15 quarters. 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, Baupost Group was the largest shareholder of Allergan plc (NYSE:AGN), with a stake worth $698.3 million reported as of the end of March. Trailing Baupost Group was Appaloosa Management LP, which amassed a stake valued at $458.8 million. King Street Capital, Renaissance Technologies, and Southeastern Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Allergan plc (NYSE:AGN) has faced a decline in interest from hedge fund managers, logic holds that there exists a select few hedgies who sold off their entire stakes last quarter. Interestingly, David Cohen and Harold Levy’s Iridian Asset Management cut the largest investment of the 700 funds followed by Insider Monkey, worth about $168.3 million in call options, and Stephen DuBois’s Camber Capital Management was right behind this move, as the fund dumped about $133.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 8 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Allergan plc (NYSE:AGN). We will take a look at Tesla Inc. (NASDAQ:TSLA), Zoetis Inc (NYSE:ZTS), The Bank of New York Mellon Corporation (NYSE:BK), and Honda Motor Co Ltd (NYSE:HMC). This group of stocks’ market valuations are closest to AGN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TSLA | 32 | 1066853 | -15 |
| ZTS | 37 | 2348595 | -8 |
| BK | 36 | 5272376 | 11 |
| HMC | 9 | 67519 | -4 |
| Average | 28.5 | 2188836 | -4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $2189 million. That figure was $3990 million in AGN’s case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand Honda Motor Co Ltd (NYSE:HMC) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Allergan plc (NYSE:AGN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately AGN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AGN were disappointed as the stock returned -15.9% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
