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Did Hedge Funds Drop The Ball On Herbalife Nutrition Ltd. (HLF) ?

Reymerlyn Martin

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 Herbalife Nutrition Ltd. (NYSE:HLF).

Herbalife Nutrition Ltd. (NYSE:HLF) was in 22 hedge funds' portfolios at the end of September. HLF shareholders have witnessed a decrease in hedge fund sentiment recently. There were 27 hedge funds in our database with HLF holdings at the end of the previous quarter. Our calculations also showed that HLF isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_25910" align="aligncenter" width="598"] Carl Icahn of Icahn Capital[/caption]

Most Popular Stocks Among Hedge Funds

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a gander at the fresh hedge fund action encompassing Herbalife Nutrition Ltd. (NYSE:HLF).

How are hedge funds trading Herbalife Nutrition Ltd. (NYSE:HLF)?

At Q3's end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from the second quarter of 2019. On the other hand, there were a total of 38 hedge funds with a bullish position in HLF a year ago. With the smart money's capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

According to Insider Monkey's hedge fund database, Carl Icahn's Icahn Capital has the number one position in Herbalife Nutrition Ltd. (NYSE:HLF), worth close to $1.3337 billion, comprising 5.2% of its total 13F portfolio. On Icahn Capital's heels is Deccan Value Advisors, managed by Vinit Bodas, which holds a $447 million position; the fund has 38.9% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish include Renaissance Technologies, David E. Shaw's D E Shaw and William Duhamel's Route One Investment Company. In terms of the portfolio weights assigned to each position Deccan Value Advisors allocated the biggest weight to Herbalife Nutrition Ltd. (NYSE:HLF), around 38.87% of its 13F portfolio. Bronte Capital is also relatively very bullish on the stock, designating 15.47 percent of its 13F equity portfolio to HLF.

Seeing as Herbalife Nutrition Ltd. (NYSE:HLF) has experienced declining sentiment from hedge fund managers, it's safe to say that there was a specific group of fund managers that decided to sell off their entire stakes by the end of the third quarter. At the top of the heap, David E. Shaw's D E Shaw sold off the biggest investment of the 750 funds watched by Insider Monkey, valued at about $66.5 million in stock, and Sculptor Capital was right behind this move, as the fund cut about $60.2 million worth. These moves are important to note, as total hedge fund interest fell by 5 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks similar to Herbalife Nutrition Ltd. (NYSE:HLF). We will take a look at SolarWinds Inc (NYSE:SWI), Medidata Solutions Inc (NASDAQ:MDSO), Tata Motors Limited (NYSE:TTM), and IDACORP Inc (NYSE:IDA). This group of stocks' market caps resemble HLF's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SWI,13,2504777,-9 MDSO,23,585095,-7 TTM,7,93303,-4 IDA,18,366303,-4 Average,15.25,887370,-6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $887 million. That figure was $2656 million in HLF's case. Medidata Solutions Inc (NASDAQ:MDSO) is the most popular stock in this table. On the other hand Tata Motors Limited (NYSE:TTM) is the least popular one with only 7 bullish hedge fund positions. Herbalife Nutrition Ltd. (NYSE:HLF) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on HLF as the stock returned 20.5% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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