Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Emergent Biosolutions Inc (NYSE:EBS).
Hedge fund interest in Emergent Biosolutions Inc (NYSE:EBS) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare EBS to other stocks including Semtech Corporation (NASDAQ:SMTC), Trinity Industries, Inc. (NYSE:TRN), and Hutchison China MediTech Limited (NASDAQ:HCM) to get a better sense of its popularity.
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 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.
Let's take a gander at the fresh hedge fund action encompassing Emergent Biosolutions Inc (NYSE:EBS).
What does the smart money think about Emergent Biosolutions Inc (NYSE:EBS)?
Heading into the first quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2018. On the other hand, there were a total of 15 hedge funds with a bullish position in EBS a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Emergent Biosolutions Inc (NYSE:EBS) was held by Renaissance Technologies, which reported holding $94.6 million worth of stock at the end of September. It was followed by GLG Partners with a $33.8 million position. Other investors bullish on the company included Fisher Asset Management, AQR Capital Management, and D E Shaw.
Seeing as Emergent Biosolutions Inc (NYSE:EBS) has faced a decline in interest from hedge fund managers, logic holds that there is a sect of hedge funds who were dropping their entire stakes heading into Q3. Interestingly, Roger Ibbotson's Zebra Capital Management said goodbye to the largest investment of the 700 funds followed by Insider Monkey, comprising an estimated $0.3 million in stock. Chuck Royce's fund, Royce & Associates, also dumped its stock, about $0 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to Emergent Biosolutions Inc (NYSE:EBS). We will take a look at Semtech Corporation (NASDAQ:SMTC), Trinity Industries, Inc. (NYSE:TRN), Hutchison China MediTech Limited (NASDAQ:HCM), and Holly Energy Partners, L.P. (NYSE:HEP). All of these stocks' market caps resemble EBS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SMTC,19,117355,6 TRN,27,766580,-6 HCM,5,5434,-4 HEP,2,2881,-1 Average,13.25,223063,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $223 million. That figure was $197 million in EBS's case. Trinity Industries, Inc. (NYSE:TRN) is the most popular stock in this table. On the other hand Holly Energy Partners, L.P. (NYSE:HEP) is the least popular one with only 2 bullish hedge fund positions. Emergent Biosolutions Inc (NYSE:EBS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately EBS wasn't nearly as popular as these 15 stock and hedge funds that were betting on EBS were disappointed as the stock returned -11.9% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.