It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Eli Lilly and Company (NYSE:LLY).
Is Eli Lilly and Company (NYSE:LLY) undervalued? Money managers are selling. The number of bullish hedge fund bets shrunk by 2 recently. Our calculations also showed that LLY 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). LLY was in 41 hedge funds' portfolios at the end of the third quarter of 2019. There were 43 hedge funds in our database with LLY positions at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_26335" align="alignnone" width="600"] Ken Fisher of Fisher Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. 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 already gained 20 percent. With all of this in mind we're going to take a gander at the key hedge fund action surrounding Eli Lilly and Company (NYSE:LLY).
How have hedgies been trading Eli Lilly and Company (NYSE:LLY)?
At Q3's end, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. By comparison, 40 hedge funds held shares or bullish call options in LLY a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Fisher Asset Management was the largest shareholder of Eli Lilly and Company (NYSE:LLY), with a stake worth $481.6 million reported as of the end of September. Trailing Fisher Asset Management was AQR Capital Management, which amassed a stake valued at $323.1 million. Two Sigma Advisors, Arrowstreet Capital, and Point72 Asset 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 Sivik Global Healthcare allocated the biggest weight to Eli Lilly and Company (NYSE:LLY), around 3.1% of its 13F portfolio. Huber Capital Management is also relatively very bullish on the stock, dishing out 2.09 percent of its 13F equity portfolio to LLY.
Seeing as Eli Lilly and Company (NYSE:LLY) has faced declining sentiment from the smart money, we can see that there is a sect of fund managers who were dropping their positions entirely heading into Q4. Intriguingly, Benjamin A. Smith's Laurion Capital Management said goodbye to the biggest position of the "upper crust" of funds monitored by Insider Monkey, valued at close to $22.4 million in call options. David Costen Haley's fund, HBK Investments, also sold off its call options, about $20.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 2 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks similar to Eli Lilly and Company (NYSE:LLY). We will take a look at GlaxoSmithKline plc (NYSE:GSK), Toronto-Dominion Bank (NYSE:TD), NVIDIA Corporation (NASDAQ:NVDA), and Starbucks Corporation (NASDAQ:SBUX). This group of stocks' market values resemble LLY's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GSK,26,1891012,1 TD,15,295029,-3 NVDA,48,1473439,3 SBUX,52,5593793,3 Average,35.25,2313318,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $2313 million. That figure was $1490 million in LLY's case. Starbucks Corporation (NASDAQ:SBUX) is the most popular stock in this table. On the other hand Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 15 bullish hedge fund positions. Eli Lilly and Company (NYSE:LLY) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately LLY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LLY were disappointed as the stock returned 15.9% in 2019 (through December 23rd) 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. 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.