Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's analyze whether Emergent Biosolutions Inc (NYSE:EBS) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.
Emergent Biosolutions Inc (NYSE:EBS) has experienced a decrease in hedge fund sentiment in recent months. Our calculations also showed that EBS isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 more than 41 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 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_193003" align="aligncenter" width="400"] Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's take a look at the fresh hedge fund action surrounding Emergent Biosolutions Inc (NYSE:EBS).
How are hedge funds trading Emergent Biosolutions Inc (NYSE:EBS)?
At the end of the fourth quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -37% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in EBS a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
The largest stake in Emergent Biosolutions Inc (NYSE:EBS) was held by Renaissance Technologies, which reported holding $41.2 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $34 million position. Other investors bullish on the company included Royce & Associates, Marshall Wace LLP, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Emergent Biosolutions Inc (NYSE:EBS), around 0.23% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.15 percent of its 13F equity portfolio to EBS.
Seeing as Emergent Biosolutions Inc (NYSE:EBS) has faced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of hedge funds who sold off their full holdings in the third quarter. Intriguingly, Michael Kharitonov and Jon David McAuliffe's Voleon Capital dropped the biggest stake of the "upper crust" of funds tracked by Insider Monkey, valued at close to $1.6 million in stock, and Noam Gottesman's GLG Partners was right behind this move, as the fund cut about $1.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 7 funds in the third quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Emergent Biosolutions Inc (NYSE:EBS) but similarly valued. These stocks are Brandywine Realty Trust (NYSE:BDN), SINA Corp (NASDAQ:SINA), Rapid7 Inc (NASDAQ:RPD), and El Paso Electric Company (NYSE:EE). All of these stocks' market caps resemble EBS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BDN,18,99587,-1 SINA,18,168492,-2 RPD,23,228346,-5 EE,15,343255,1 Average,18.5,209920,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $210 million. That figure was $123 million in EBS's case. Rapid7 Inc (NASDAQ:RPD) is the most popular stock in this table. On the other hand El Paso Electric Company (NYSE:EE) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Emergent Biosolutions Inc (NYSE:EBS) is even less popular than EE. Hedge funds clearly dropped the ball on EBS as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on EBS as the stock returned 1.4% during the same time period and outperformed the market by an even larger margin. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.