Were Hedge Funds Right About Baxter International Inc. (BAX)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Baxter International Inc. (NYSE:BAX)? The smart money sentiment can provide an answer to this question.

Baxter International Inc. (NYSE:BAX) investors should pay attention to an increase in hedge fund interest in recent months. Baxter International Inc. (NYSE:BAX) was in 59 hedge funds’ portfolios at the end of June. The all time high for this statistics is 54. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that BAX isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Aaron Cowen of Suvretta Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s go over the fresh hedge fund action surrounding Baxter International Inc. (NYSE:BAX).

Hedge fund activity in Baxter International Inc. (NYSE:BAX)

At the end of June, a total of 59 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the first quarter of 2020. By comparison, 34 hedge funds held shares or bullish call options in BAX a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Generation Investment Management was the largest shareholder of Baxter International Inc. (NYSE:BAX), with a stake worth $913.2 million reported as of the end of September. Trailing Generation Investment Management was Third Point, which amassed a stake valued at $344.4 million. Two Sigma Advisors, AQR Capital Management, and Arrowstreet Capital 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 Tavio Capital allocated the biggest weight to Baxter International Inc. (NYSE:BAX), around 7.81% of its 13F portfolio. Iron Triangle Partners is also relatively very bullish on the stock, designating 7.16 percent of its 13F equity portfolio to BAX.

Now, specific money managers have been driving this bullishness. Suvretta Capital Management, managed by Aaron Cowen, initiated the largest position in Baxter International Inc. (NYSE:BAX). Suvretta Capital Management had $103.7 million invested in the company at the end of the quarter. Greg Poole’s Echo Street Capital Management also initiated a $30.3 million position during the quarter. The other funds with brand new BAX positions are Sander Gerber’s Hudson Bay Capital Management, Henrik Rhenman’s Rhenman & Partners Asset Management, and Amy Mulderry’s Tavio Capital.

Let’s now take a look at hedge fund activity in other stocks similar to Baxter International Inc. (NYSE:BAX). We will take a look at Itau Unibanco Holding SA (NYSE:ITUB), Biogen Inc. (NASDAQ:BIIB), The Charles Schwab Corporation (NYSE:SCHW), General Dynamics Corporation (NYSE:GD), Vodafone Group Plc (NASDAQ:VOD), National Grid plc (NYSE:NGG), and Ferrari N.V. (NYSE:RACE). This group of stocks’ market values resemble BAX’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.1 hedge funds with bullish positions and the average amount invested in these stocks was $2132 million. That figure was $2583 million in BAX’s case. The Charles Schwab Corporation (NYSE:SCHW) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 2 bullish hedge fund positions. Baxter International Inc. (NYSE:BAX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BAX is 81.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately BAX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on BAX were disappointed as the stock returned -4.7% since the end of June (through 10/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.