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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Baxter International Inc. (NYSE:BAX).
Is BAX a good stock to buy now? Baxter International Inc. (NYSE:BAX) investors should be aware of a decrease in hedge fund interest lately. Baxter International Inc. (NYSE:BAX) was in 51 hedge funds' portfolios at the end of September. The all time high for this statistics is 59. There were 59 hedge funds in our database with BAX positions at the end of the second quarter. Our calculations also showed that BAX isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Peter Rathjens of Arrowstreet Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 5 best cheap stocks to buy according to Ray Dalio to identify stocks with upside potential. 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. Now let's analyze the fresh hedge fund action regarding Baxter International Inc. (NYSE:BAX).
What have hedge funds been doing with Baxter International Inc. (NYSE:BAX)?
At Q3's end, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in BAX over the last 21 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Generation Investment Management was the largest shareholder of Baxter International Inc. (NYSE:BAX), with a stake worth $953.6 million reported as of the end of September. Trailing Generation Investment Management was D E Shaw, which amassed a stake valued at $219.6 million. Two Sigma Advisors, Arrowstreet Capital, and AQR Capital Management 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 Generation Investment Management allocated the biggest weight to Baxter International Inc. (NYSE:BAX), around 5.06% of its 13F portfolio. Prosight Capital is also relatively very bullish on the stock, earmarking 4.67 percent of its 13F equity portfolio to BAX.
Seeing as Baxter International Inc. (NYSE:BAX) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few money managers that slashed their positions entirely in the third quarter. At the top of the heap, Dan Loeb's Third Point dumped the largest investment of the 750 funds watched by Insider Monkey, totaling an estimated $344.4 million in stock. Aaron Cowen's fund, Suvretta Capital Management, also dropped its stock, about $103.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 8 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to Baxter International Inc. (NYSE:BAX). These stocks are National Grid plc (NYSE:NGG), American Electric Power Company, Inc. (NYSE:AEP), Rocket Companies, Inc. (NYSE:RKT), UBS Group AG (NYSE:UBS), DocuSign, Inc. (NASDAQ:DOCU), General Dynamics Corporation (NYSE:GD), and Thomson Reuters Corporation (NYSE:TRI). This group of stocks' market valuations match BAX's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NGG,6,379092,4 AEP,30,436472,-4 RKT,22,319461,22 UBS,17,497673,1 DOCU,62,3559604,5 GD,37,5036732,-5 TRI,19,315477,-6 Average,27.6,1506359,2.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.6 hedge funds with bullish positions and the average amount invested in these stocks was $1506 million. That figure was $2025 million in BAX's case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 6 bullish hedge fund positions. Baxter International Inc. (NYSE:BAX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BAX is 63.1. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 31.6% in 2020 through December 2nd and beat the market again by 16 percentage points. Unfortunately BAX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on BAX were disappointed as the stock returned -5.1% since the end of September (through 12/2) 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.
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Disclosure: None. This article was originally published at Insider Monkey.