How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC).
China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 3 hedge funds' portfolios at the end of September. Our calculations also showed that SXTC 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). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Ashford Inc. (NYSE:AINC), SCWorx Corp. (NASDAQ:WORX), and Live Ventures Incorporated (NASDAQ:LIVE) to gather more data points. 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.
Michael Gelband of ExodusPoint 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 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 we're going to take a glance at the new hedge fund action encompassing China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC).
Hedge fund activity in China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC)
Heading into the fourth quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 2 hedge funds held shares or bullish call options in SXTC a year ago. With hedgies' sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Hudson Bay Capital Management was the largest shareholder of China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC), with a stake worth $0.5 million reported as of the end of September. Trailing Hudson Bay Capital Management was Renaissance Technologies, which amassed a stake valued at $0.1 million. ExodusPoint Capital was 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 Hudson Bay Capital Management allocated the biggest weight to China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC), around 0.01% of its 13F portfolio. ExodusPoint Capital is also relatively very bullish on the stock, earmarking 0.0002 percent of its 13F equity portfolio to SXTC.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. 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 ExodusPoint Capital).
Let's also examine hedge fund activity in other stocks similar to China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC). These stocks are Ashford Inc. (NYSE:AINC), SCWorx Corp. (NASDAQ:WORX), Live Ventures Incorporated (NASDAQ:LIVE), Emerson Radio Corp (NYSE:MSN), Jaguar Health, Inc. (NASDAQ:JAGX), The Dixie Group Inc (NASDAQ:DXYN), and Evolving Systems Inc (NASDAQ:EVOL). This group of stocks' market caps are similar to SXTC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AINC,3,442,0 WORX,1,25,-1 LIVE,1,311,0 MSN,1,639,-1 JAGX,1,111,-2 DXYN,2,1212,-1 EVOL,1,903,0 Average,1.4,520,-0.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 1.4 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $1 million in SXTC's case. Ashford Inc. (NYSE:AINC) is the most popular stock in this table. On the other hand SCWorx Corp. (NASDAQ:WORX) is the least popular one with only 1 bullish hedge fund positions. China SXT Pharmaceuticals, Inc. (NASDAQ:SXTC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SXTC is 85. 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. 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 28.1% in 2020 through November 23rd and still beat the market by 15.4 percentage points. Hedge funds were also right about betting on SXTC as the stock returned 17.6% since the end of Q3 (through 11/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.