Were Hedge Funds Right About DexCom, Inc. (DXCM)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about DexCom, Inc. (NASDAQ:DXCM).

DexCom, Inc. (NASDAQ:DXCM) has seen a decrease in hedge fund sentiment recently. DexCom, Inc. (NASDAQ:DXCM) was in 55 hedge funds’ portfolios at the end of June. The all time high for this statistics is 58. Our calculations also showed that DXCM 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.

James E. Flynn of Deerfield 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. Now we’re going to take a glance at the key hedge fund action encompassing DexCom, Inc. (NASDAQ:DXCM).

What does smart money think about DexCom, Inc. (NASDAQ:DXCM)?

At the end of the second quarter, a total of 55 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the previous quarter. By comparison, 30 hedge funds held shares or bullish call options in DXCM a year ago. With hedge funds’ sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies,  holds the number one position in DexCom, Inc. (NASDAQ:DXCM). Renaissance Technologies has a $479.6 million position in the stock, comprising 0.4% of its 13F portfolio. Sitting at the No. 2 spot is Rajiv Jain of GQG Partners, with a $243.3 million position; 1.1% of its 13F portfolio is allocated to the stock. Other professional money managers with similar optimism contain Lone Pine Capital,  OrbiMed Advisors and James E. Flynn’s Deerfield Management. In terms of the portfolio weights assigned to each position Aubrey Capital Management allocated the biggest weight to DexCom, Inc. (NASDAQ:DXCM), around 4.05% of its 13F portfolio. Parkman Healthcare Partners is also relatively very bullish on the stock, dishing out 3.72 percent of its 13F equity portfolio to DXCM.

Due to the fact that DexCom, Inc. (NASDAQ:DXCM) has witnessed declining sentiment from the smart money, it’s easy to see that there is a sect of money managers that slashed their entire stakes heading into Q3. Interestingly, Ken Griffin’s Citadel Investment Group sold off the largest stake of all the hedgies watched by Insider Monkey, valued at close to $416.6 million in stock, and Michael Johnston’s Steelhead Partners was right behind this move, as the fund dropped about $59 million worth. These moves are important to note, as total hedge fund interest dropped by 3 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks similar to DexCom, Inc. (NASDAQ:DXCM). We will take a look at Digital Realty Trust, Inc. (NYSE:DLR), Electronic Arts Inc. (NASDAQ:EA), BCE Inc. (NYSE:BCE), General Mills, Inc. (NYSE:GIS), Walgreens Boots Alliance Inc (NASDAQ:WBA), Emerson Electric Co. (NYSE:EMR), and eBay Inc (NASDAQ:EBAY). This group of stocks’ market valuations resemble DXCM’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.9 hedge funds with bullish positions and the average amount invested in these stocks was $1326 million. That figure was $1711 million in DXCM’s case. Electronic Arts Inc. (NASDAQ:EA) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 10 bullish hedge fund positions. DexCom, Inc. (NASDAQ:DXCM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DXCM is 69.9. 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 DXCM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DXCM were disappointed as the stock returned -0.1% 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.