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

Abigail Fisher

We can judge whether Catalent Inc (NYSE:CTLT) 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.

Is Catalent Inc (NYSE:CTLT) a worthy investment now? Hedge funds are becoming less hopeful. The number of long hedge fund bets were cut by 4 in recent months. Our calculations also showed that CTLT isn't among the 30 most popular stocks among hedge funds. CTLT was in 15 hedge funds' portfolios at the end of the first quarter of 2019. There were 19 hedge funds in our database with CTLT 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 market by 40 percentage points since May 2014 through May 30, 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

Let's take a peek at the key hedge fund action regarding Catalent Inc (NYSE:CTLT).

Hedge fund activity in Catalent Inc (NYSE:CTLT)

At the end of the first quarter, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in CTLT a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

CTLT_june2019

Of the funds tracked by Insider Monkey, Andreas Halvorsen's Viking Global has the largest position in Catalent Inc (NYSE:CTLT), worth close to $43 million, accounting for 0.2% of its total 13F portfolio. The second most bullish fund manager is Ken Griffin of Citadel Investment Group, with a $42.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other peers that are bullish consist of D. E. Shaw's D E Shaw, and Mariko Gordon's Daruma Asset Management.

Judging by the fact that Catalent Inc (NYSE:CTLT) has witnessed a decline in interest from the smart money, it's safe to say that there were a few fund managers who sold off their full holdings in the third quarter. Intriguingly, Robert Joseph Caruso's Select Equity Group dumped the biggest stake of the 700 funds watched by Insider Monkey, comprising about $24.4 million in stock. Jim Simons's fund, Renaissance Technologies, also sold off its stock, about $13.2 million worth. These transactions are important to note, as total hedge fund interest dropped by 4 funds in the third quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Catalent Inc (NYSE:CTLT) but similarly valued. We will take a look at Cree, Inc. (NASDAQ:CREE), Sabre Corporation (NASDAQ:SABR), Woodward Inc (NASDAQ:WWD), and LPL Financial Holdings Inc (NASDAQ:LPLA). This group of stocks' market values match CTLT's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CREE,14,88463,5 SABR,21,260999,-3 WWD,20,268959,6 LPLA,33,807308,-1 Average,22,356432,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $356 million. That figure was $146 million in CTLT's case. LPL Financial Holdings Inc (NASDAQ:LPLA) is the most popular stock in this table. On the other hand Cree, Inc. (NASDAQ:CREE) is the least popular one with only 14 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 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on CTLT as the stock returned 24.6% during the same time frame and outperformed the market by an even larger margin.

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

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