Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Adaptimmune Therapeutics plc (NASDAQ:ADAP) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of September. At the end of this article we will also compare ADAP to other stocks including Craft Brew Alliance Inc (NASDAQ:BREW), Escalade, Inc. (NASDAQ:ESCA), and FNCB Bancorp Inc. (NASDAQ:FNCB) to get a better sense of its popularity. Video: Click the image to 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 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_341400" align="aligncenter" width="600"] Samuel Isaly of OrbiMed Advisors[/caption]
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 Adaptimmune Therapeutics plc (NASDAQ:ADAP).
How have hedgies been trading Adaptimmune Therapeutics plc (NASDAQ:ADAP)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in ADAP a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Matrix Capital Management was the largest shareholder of Adaptimmune Therapeutics plc (NASDAQ:ADAP), with a stake worth $42.3 million reported as of the end of September. Trailing Matrix Capital Management was GLG Partners, which amassed a stake valued at $3.1 million. OrbiMed Advisors, Millennium Management, and Renaissance Technologies 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 Matrix Capital Management allocated the biggest weight to Adaptimmune Therapeutics plc (NASDAQ:ADAP), around 1.04% of its 13F portfolio. Rock Springs Capital Management is also relatively very bullish on the stock, designating 0.05 percent of its 13F equity portfolio to ADAP.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Springbok Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Marshall Wace).
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Adaptimmune Therapeutics plc (NASDAQ:ADAP) but similarly valued. These stocks are Craft Brew Alliance Inc (NASDAQ:BREW), Escalade, Inc. (NASDAQ:ESCA), FNCB Bancorp Inc. (NASDAQ:FNCB), and CannTrust Holdings Inc. (NYSE:CTST). This group of stocks' market values resemble ADAP's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BREW,14,11952,2 ESCA,3,11273,0 FNCB,3,457,2 CTST,5,715,-7 Average,6.25,6099,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $52 million in ADAP's case. Craft Brew Alliance Inc (NASDAQ:BREW) is the most popular stock in this table. On the other hand Escalade, Inc. (NASDAQ:ESCA) is the least popular one with only 3 bullish hedge fund positions. Adaptimmune Therapeutics plc (NASDAQ:ADAP) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ADAP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ADAP were disappointed as the stock returned -22.5% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.