How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Brookdale Senior Living, Inc. (NYSE:BKD) and determine whether hedge funds had an edge regarding this stock.
Brookdale Senior Living, Inc. (NYSE:BKD) was in 24 hedge funds' portfolios at the end of June. The all time high for this statistics is 66. BKD investors should be aware of an increase in enthusiasm from smart money of late. There were 17 hedge funds in our database with BKD holdings at the end of March. Our calculations also showed that BKD isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
Lee Ainslie of Maverick Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we're going to view the fresh hedge fund action regarding Brookdale Senior Living, Inc. (NYSE:BKD).
How have hedgies been trading Brookdale Senior Living, Inc. (NYSE:BKD)?
At second quarter's end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 41% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in BKD a year ago. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, Camber Capital Management was the largest shareholder of Brookdale Senior Living, Inc. (NYSE:BKD), with a stake worth $44.3 million reported as of the end of September. Trailing Camber Capital Management was Deerfield Management, which amassed a stake valued at $41 million. Glenview Capital, Renaissance Technologies, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position North Run Capital allocated the biggest weight to Brookdale Senior Living, Inc. (NYSE:BKD), around 3.88% of its 13F portfolio. Berylson Capital Partners is also relatively very bullish on the stock, designating 2.75 percent of its 13F equity portfolio to BKD.
With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Berylson Capital Partners, managed by James Thomas Berylson, assembled the largest position in Brookdale Senior Living, Inc. (NYSE:BKD). Berylson Capital Partners had $4.5 million invested in the company at the end of the quarter. Greg Eisner's Engineers Gate Manager also made a $1.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Israel Englander's Millennium Management, Lee Ainslie's Maverick Capital, and Michael Gelband's ExodusPoint Capital.
Let's also examine hedge fund activity in other stocks similar to Brookdale Senior Living, Inc. (NYSE:BKD). These stocks are Innate Pharma S.A. (NASDAQ:IPHA), Signet Jewelers Limited (NYSE:SIG), Mercer International Inc. (NASDAQ:MERC), Anika Therapeutics, Inc. (NASDAQ:ANIK), Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX), LeMaitre Vascular Inc (NASDAQ:LMAT), and MYR Group Inc (NASDAQ:MYRG). All of these stocks' market caps are closest to BKD's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IPHA,3,10337,-1 SIG,16,183325,-9 MERC,10,103564,0 ANIK,13,56320,-6 SNDX,24,175236,5 LMAT,9,6857,3 MYRG,8,30656,-2 Average,11.9,80899,-1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.9 hedge funds with bullish positions and the average amount invested in these stocks was $81 million. That figure was $199 million in BKD's case. Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX) is the most popular stock in this table. On the other hand Innate Pharma S.A. (NASDAQ:IPHA) is the least popular one with only 3 bullish hedge fund positions. Brookdale Senior Living, Inc. (NYSE:BKD) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BKD is 70.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately BKD wasn't nearly as popular as these 10 stocks and hedge funds that were betting on BKD were disappointed as the stock returned -15.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.