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2019 Review: Top Hedge Fund Stocks vs. Universal Health Services, Inc. (UHS)

Reymerlyn Martin

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57%. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 41.3% in 2019 and outperformed the broader market benchmark by 10.1 percentage points. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Universal Health Services, Inc. (NYSE:UHS) has seen an increase in hedge fund sentiment recently. Our calculations also showed that UHS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 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.

[caption id="attachment_26869" align="aligncenter" width="600"] Larry Robbins of Glenview Capital[/caption]

GLENVIEW CAPITAL
GLENVIEW CAPITAL

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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind let's take a glance at the new hedge fund action encompassing Universal Health Services, Inc. (NYSE:UHS).

What have hedge funds been doing with Universal Health Services, Inc. (NYSE:UHS)?

At Q3's end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in UHS over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Universal Health Services, Inc. (NYSE:UHS) was held by AQR Capital Management, which reported holding $130.6 million worth of stock at the end of September. It was followed by Glenview Capital with a $110 million position. Other investors bullish on the company included Camber Capital Management, Winton Capital Management, and Sirios Capital Management. In terms of the portfolio weights assigned to each position Camber Capital Management allocated the biggest weight to Universal Health Services, Inc. (NYSE:UHS), around 3.91% of its 13F portfolio. Sivik Global Healthcare is also relatively very bullish on the stock, dishing out 3.75 percent of its 13F equity portfolio to UHS.

Now, specific money managers have been driving this bullishness. Laurion Capital Management, managed by Benjamin A. Smith, initiated the biggest position in Universal Health Services, Inc. (NYSE:UHS). Laurion Capital Management had $3.6 million invested in the company at the end of the quarter. Jeffrey Talpins's Element Capital Management also made a $1.7 million investment in the stock during the quarter. The other funds with brand new UHS positions are Lee Ainslie's Maverick Capital, Michael Gelband's ExodusPoint Capital, and Ray Dalio's Bridgewater Associates.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Universal Health Services, Inc. (NYSE:UHS) but similarly valued. These stocks are Vistra Energy Corp. (NYSE:VST), Fortinet Inc (NASDAQ:FTNT), Genmab A/S (NASDAQ:GMAB), and International Flavors & Fragrances Inc (NYSE:IFF). All of these stocks' market caps match UHS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VST,42,2382348,3 FTNT,38,1187931,4 GMAB,10,136229,10 IFF,19,202887,1 Average,27.25,977349,4.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $977 million. That figure was $563 million in UHS's case. Vistra Energy Corp. (NYSE:VST) is the most popular stock in this table. On the other hand Genmab A/S (NASDAQ:GMAB) is the least popular one with only 10 bullish hedge fund positions. Universal Health Services, Inc. (NYSE:UHS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately UHS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); UHS investors were disappointed as the stock returned 23.6% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

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

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