Were Hedge Funds Right About Piling Into Edwards Lifesciences Corporation (EW)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Edwards Lifesciences Corporation (NYSE:EW) and determine whether hedge funds skillfully traded this stock.

Is Edwards Lifesciences Corporation (NYSE:EW) undervalued? Money managers were in a bullish mood. The number of bullish hedge fund bets went up by 4 recently. Our calculations also showed that EW isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). EW was in 49 hedge funds’ portfolios at the end of March. There were 45 hedge funds in our database with EW holdings at the end of the previous quarter.

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 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 S&P 500 ETFs by 58 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 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.

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a peek at the new hedge fund action regarding Edwards Lifesciences Corporation (NYSE:EW).

How have hedgies been trading Edwards Lifesciences Corporation (NYSE:EW)?

At the end of the first quarter, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in EW a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the most valuable position in Edwards Lifesciences Corporation (NYSE:EW). Fisher Asset Management has a $255.5 million position in the stock, comprising 0.3% of its 13F portfolio. Sitting at the No. 2 spot is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $155.4 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Some other peers that hold long positions comprise Cliff Asness’s AQR Capital Management, Nicolai Tangen’s Ako Capital and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Ako Capital allocated the biggest weight to Edwards Lifesciences Corporation (NYSE:EW), around 3% of its 13F portfolio. Giverny Capital is also relatively very bullish on the stock, designating 2.84 percent of its 13F equity portfolio to EW.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Holocene Advisors, managed by Brandon Haley, created the most outsized position in Edwards Lifesciences Corporation (NYSE:EW). Holocene Advisors had $79.3 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $17 million position during the quarter. The other funds with new positions in the stock are Michael Rockefeller and KarláKroeker’s Woodline Partners, Henrik Rhenman’s Rhenman & Partners Asset Management, and James Crichton’s Hitchwood Capital Management.

Let’s check out hedge fund activity in other stocks similar to Edwards Lifesciences Corporation (NYSE:EW). We will take a look at L3Harris Technologies, Inc. (NASDAQ:LHX), Banco Santander, S.A. (NYSE:SAN), Honda Motor Co Ltd (NYSE:HMC), and America Movil SAB de CV (NYSE:AMX). This group of stocks’ market valuations are closest to EW’s market valuation.

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As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $554 million. That figure was $1405 million in EW’s case. L3Harris Technologies, Inc. (NASDAQ:LHX) 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 8 bullish hedge fund positions. Compared to these stocks Edwards Lifesciences Corporation (NYSE:EW) is more popular among hedge funds. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately EW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EW were disappointed as the stock returned 9.9% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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