Is Lannett Company, Inc. (NYSE:LCI) a good investment right now? We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.
Is Lannett Company, Inc. (NYSE:LCI) a buy right now? The smart money is becoming hopeful. The number of bullish hedge fund bets improved by 2 recently. Our calculations also showed that LCI 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
David E. Shaw of D.E. Shaw
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. We’re going to check out the latest hedge fund action encompassing Lannett Company, Inc. (NYSE:LCI).
Hedge fund activity in Lannett Company, Inc. (NYSE:LCI)
At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the second quarter of 2019. By comparison, 10 hedge funds held shares or bullish call options in LCI a year ago. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
More specifically, D E Shaw was the largest shareholder of Lannett Company, Inc. (NYSE:LCI), with a stake worth $40.8 million reported as of the end of September. Trailing D E Shaw was Renaissance Technologies, which amassed a stake valued at $24.8 million. Arrowstreet Capital, Citadel Investment Group, and Lonestar 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 Lonestar Capital Management allocated the biggest weight to Lannett Company, Inc. (NYSE:LCI), around 1.11% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, setting aside 0.68 percent of its 13F equity portfolio to LCI.
As one would reasonably expect, key hedge funds were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most outsized position in Lannett Company, Inc. (NYSE:LCI). Arrowstreet Capital had $4.6 million invested in the company at the end of the quarter. Jerome L. Simon’s Lonestar Capital Management also made a $3.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners and Bruce Kovner’s Caxton Associates.
Let’s check out hedge fund activity in other stocks similar to Lannett Company, Inc. (NYSE:LCI). These stocks are Powell Industries, Inc. (NASDAQ:POWL), Turning Point Brands, Inc. (NYSE:TPB), Maxar Technologies Inc. (NYSE:MAXR), and OMNOVA Solutions Inc. (NYSE:OMN). This group of stocks’ market caps are closest to LCI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| POWL | 16 | 48089 | 5 |
| TPB | 17 | 39440 | 3 |
| MAXR | 19 | 37391 | 7 |
| OMN | 19 | 96489 | 3 |
| Average | 17.75 | 55352 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $55 million. That figure was $83 million in LCI’s case. Maxar Technologies Inc. (NYSE:MAXR) is the most popular stock in this table. On the other hand Powell Industries, Inc. (NASDAQ:POWL) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Lannett Company, Inc. (NYSE:LCI) is even less popular than POWL. Hedge funds dodged a bullet by taking a bearish stance towards LCI. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately LCI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); LCI investors were disappointed as the stock returned -21.3% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
