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Hedge Fund Favorites vs. United Therapeutics Corporation (UTHR) In 2019

Abigail Fisher

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves. In this article, we look at what those funds think of United Therapeutics Corporation (NASDAQ:UTHR) based on that data.

United Therapeutics Corporation (NASDAQ:UTHR) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 30 hedge funds' portfolios at the end of the third quarter of 2019. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Univar Solutions Inc (NYSE:UNVR), Medallia, Inc. (NYSE:MDLA), and Bank of Hawaii Corporation (NYSE:BOH) to gather more data points. Our calculations also showed that UTHR 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_338867" align="aligncenter" width="500"] Justin John Ferayorni of Tamarack Capital Management[/caption]

Justin John Ferayorni - Tamarack Capital Management

We leave no stone unturned when looking for the next great investment idea. For example 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. 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. With all of this in mind let's review the new hedge fund action encompassing United Therapeutics Corporation (NASDAQ:UTHR).

What have hedge funds been doing with United Therapeutics Corporation (NASDAQ:UTHR)?

Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. By comparison, 18 hedge funds held shares or bullish call options in UTHR a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in United Therapeutics Corporation (NASDAQ:UTHR), which was worth $256.2 million at the end of the third quarter. On the second spot was Millennium Management which amassed $133.6 million worth of shares. Citadel Investment Group, Palo Alto Investors, and Consonance Capital Management 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 Consonance Capital Management allocated the biggest weight to United Therapeutics Corporation (NASDAQ:UTHR), around 7.64% of its 13F portfolio. Palo Alto Investors is also relatively very bullish on the stock, designating 7.57 percent of its 13F equity portfolio to UTHR.

Seeing as United Therapeutics Corporation (NASDAQ:UTHR) has experienced declining sentiment from the aggregate hedge fund industry, it's safe to say that there was a specific group of hedgies that slashed their full holdings in the third quarter. At the top of the heap, Michael Kharitonov and Jon David McAuliffe's Voleon Capital dropped the largest investment of the "upper crust" of funds monitored by Insider Monkey, totaling close to $3.3 million in stock. Ben Levine, Andrew Manuel and Stefan Renold's fund, LMR Partners, also dumped its stock, about $2 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as United Therapeutics Corporation (NASDAQ:UTHR) but similarly valued. We will take a look at Univar Solutions Inc (NYSE:UNVR), Medallia, Inc. (NYSE:MDLA), Bank of Hawaii Corporation (NYSE:BOH), and MorphoSys AG (NASDAQ:MOR). This group of stocks' market valuations are similar to UTHR's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UNVR,37,1331993,6 MDLA,23,250641,23 BOH,13,104848,1 MOR,4,6546,-2 Average,19.25,423507,7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $424 million. That figure was $1132 million in UTHR's case. Univar Solutions Inc (NYSE:UNVR) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 4 bullish hedge fund positions. United Therapeutics Corporation (NASDAQ:UTHR) 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately UTHR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on UTHR were disappointed as the stock returned -16.5% in 2019 (through December 23rd) and underperformed 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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