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Did Hedge Funds Drop The Ball On Catalent Inc (CTLT) ?

Reymerlyn Martin

A market correction in the fourth quarter, spurred by a number of global macroeconomic concerns and rising interest rates ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. This is evident in the fact that the Russell 2000 ETF underperformed the S&P 500 ETF by nearly 7 percentage points during the fourth quarter. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let's study the hedge fund sentiment to see how those concerns affected their ownership of Catalent Inc (NYSE:CTLT) during the quarter.

Is Catalent Inc (NYSE:CTLT) going to take off soon? Hedge funds are reducing their bets on the stock. The number of bullish hedge fund bets shrunk by 4 recently. Our calculations also showed that CTLT isn't among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

Andreas Halvorsen

We're going to take a look at the key hedge fund action encompassing Catalent Inc (NYSE:CTLT).

Hedge fund activity in Catalent Inc (NYSE:CTLT)

At the end of the fourth quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CTLT over the last 14 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

CTLT_apr2019

Among these funds, D E Shaw held the most valuable stake in Catalent Inc (NYSE:CTLT), which was worth $73.9 million at the end of the third quarter. On the second spot was Viking Global which amassed $49.2 million worth of shares. Moreover, Citadel Investment Group, Select Equity Group, and Renaissance Technologies were also bullish on Catalent Inc (NYSE:CTLT), allocating a large percentage of their portfolios to this stock.

Seeing as Catalent Inc (NYSE:CTLT) has experienced falling interest from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of hedgies that decided to sell off their full holdings by the end of the third quarter. It's worth mentioning that Jeremy Green's Redmile Group said goodbye to the biggest investment of the 700 funds monitored by Insider Monkey, comprising an estimated $30.5 million in stock. Michael Platt and William Reeves's fund, BlueCrest Capital Mgmt., also sold off its stock, about $3.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Catalent Inc (NYSE:CTLT) but similarly valued. These stocks are Fluor Corporation (NYSE:FLR), RealPage, Inc. (NASDAQ:RP), Hanesbrands Inc. (NYSE:HBI), and TFS Financial Corporation (NASDAQ:TFSL). All of these stocks' market caps are closest to CTLT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FLR,20,223293,-3 RP,21,343809,-6 HBI,28,310452,10 TFSL,7,137225,-2 Average,19,253695,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $254 million. That figure was $236 million in CTLT's case. Hanesbrands Inc. (NYSE:HBI) is the most popular stock in this table. On the other hand TFS Financial Corporation (NASDAQ:TFSL) is the least popular one with only 7 bullish hedge fund positions. Catalent Inc (NYSE:CTLT) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on CTLT as the stock returned 41.2% and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.

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