We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by more than 14 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ) has experienced an increase in hedge fund sentiment lately. JAZZ was in 25 hedge funds' portfolios at the end of the third quarter of 2019. There were 20 hedge funds in our database with JAZZ positions at the end of the previous quarter. Our calculations also showed that JAZZ 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).
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_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Keeping this in mind let's go over the new hedge fund action surrounding Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ).
How have hedgies been trading Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ)?
At the end of the third quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the previous quarter. On the other hand, there were a total of 29 hedge funds with a bullish position in JAZZ a year ago. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Renaissance Technologies has the largest position in Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ), worth close to $399.5 million, comprising 0.3% of its total 13F portfolio. Sitting at the No. 2 spot is Cliff Asness of AQR Capital Management, with a $169.5 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish contain Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Ken Griffin's Citadel Investment Group and Alex Denner's Sarissa Capital Management. In terms of the portfolio weights assigned to each position Sarissa Capital Management allocated the biggest weight to Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ), around 3.89% of its 13F portfolio. Redmile Group is also relatively very bullish on the stock, designating 0.8 percent of its 13F equity portfolio to JAZZ.
As one would reasonably expect, key money managers have been driving this bullishness. Point72 Asset Management, managed by Steve Cohen, initiated the biggest position in Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ). Point72 Asset Management had $27.8 million invested in the company at the end of the quarter. Peter Muller's PDT Partners also made a $7 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael Kharitonov and Jon David McAuliffe's Voleon Capital, Matthew Tewksbury's Stevens Capital Management, and Anand Parekh's Alyeska Investment Group.
Let's go over hedge fund activity in other stocks similar to Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ). These stocks are Mobile TeleSystems OJSC (NYSE:MBT), SAGE Therapeutics Inc (NASDAQ:SAGE), Proofpoint Inc (NASDAQ:PFPT), and Gildan Activewear Inc (NYSE:GIL). This group of stocks' market values are closest to JAZZ's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MBT,14,403283,6 SAGE,29,430454,4 PFPT,42,636538,6 GIL,19,348320,-5 Average,26,454649,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $455 million. That figure was $837 million in JAZZ's case. Proofpoint Inc (NASDAQ:PFPT) is the most popular stock in this table. On the other hand Mobile TeleSystems OJSC (NYSE:MBT) is the least popular one with only 14 bullish hedge fund positions. Jazz Pharmaceuticals Public Limited Company (NASDAQ:JAZZ) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately JAZZ wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); JAZZ investors were disappointed as the stock returned 20.4% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. 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.