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Did Hedge Funds Drop The Ball On Genesis Healthcare Inc (GEN)?

Debasis Saha

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Genesis Healthcare Inc (NYSE:GEN).

Is Genesis Healthcare Inc (NYSE:GEN) the right pick for your portfolio? Investors who are in the know are taking a pessimistic view. The number of long hedge fund bets shrunk by 2 lately. Our calculations also showed that GEN isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). GEN was in 4 hedge funds' portfolios at the end of September. There were 6 hedge funds in our database with GEN positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.

[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]

RENAISSANCE TECHNOLOGIES

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. Keeping this in mind let's take a glance at the recent hedge fund action surrounding Genesis Healthcare Inc (NYSE:GEN).

What have hedge funds been doing with Genesis Healthcare Inc (NYSE:GEN)?

Heading into the fourth quarter of 2019, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from one quarter earlier. By comparison, 7 hedge funds held shares or bullish call options in GEN a year ago. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Is GEN A Good Stock To Buy?

According to Insider Monkey's hedge fund database, Renaissance Technologies, holds the number one position in Genesis Healthcare Inc (NYSE:GEN). Renaissance Technologies has a $4.4 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Renaissance Technologies's heels is Millennium Management, led by Israel Englander, holding a $1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other peers with similar optimism comprise Andrew Weiss's Weiss Asset Management, Ken Griffin's Citadel Investment Group and . In terms of the portfolio weights assigned to each position Renaissance Technologies allocated the biggest weight to Genesis Healthcare Inc (NYSE:GEN), around 0.0037% of its 13F portfolio. Millennium Management is also relatively very bullish on the stock, setting aside 0.0016 percent of its 13F equity portfolio to GEN.

Seeing as Genesis Healthcare Inc (NYSE:GEN) has witnessed declining sentiment from hedge fund managers, it's safe to say that there was a specific group of money managers that slashed their positions entirely last quarter. It's worth mentioning that Phil Frohlich's Prescott Group Capital Management sold off the biggest stake of the "upper crust" of funds watched by Insider Monkey, worth about $0.3 million in stock. David E. Shaw's fund, D E Shaw, also sold off its stock, about $0 million worth. These moves are interesting, as aggregate hedge fund interest fell by 2 funds last quarter.

Let's also examine hedge fund activity in other stocks similar to Genesis Healthcare Inc (NYSE:GEN). These stocks are NL Industries, Inc. (NYSE:NL), BankFinancial Corporation (NASDAQ:BFIN), IDEAYA Biosciences, Inc. (NASDAQ:IDYA), and Zagg Inc (NASDAQ:ZAGG). This group of stocks' market values match GEN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NL,4,994,1 BFIN,5,14445,1 IDYA,9,32359,0 ZAGG,6,19642,-5 Average,6,16860,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 6 hedge funds with bullish positions and the average amount invested in these stocks was $17 million. That figure was $5 million in GEN's case. IDEAYA Biosciences, Inc. (NASDAQ:IDYA) is the most popular stock in this table. On the other hand NL Industries, Inc. (NYSE:NL) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Genesis Healthcare Inc (NYSE:GEN) is even less popular than NL. Hedge funds clearly dropped the ball on GEN as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on GEN as the stock returned 51.4% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

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