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Here Is Hedge Funds’ 22nd Most Popular Stock Pick

Reymerlyn Martin

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.

Is Allergan plc (NYSE:AGN) a buy, sell, or hold? Hedge funds are buying. The number of long hedge fund positions improved by 27 recently. Our calculations also showed that AGN is now ranked 22nd among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Matthew Halbower Pentwater Capital

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to review the fresh hedge fund action regarding Allergan plc (NYSE:AGN).

What have hedge funds been doing with Allergan plc (NYSE:AGN)?

At the end of the second quarter, a total of 80 of the hedge funds tracked by Insider Monkey were long this stock, a change of 51% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in AGN over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

AGN_oct2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Baupost Group, managed by Seth Klarman, holds the number one position in Allergan plc (NYSE:AGN). Baupost Group has a $616.1 million position in the stock, comprising 5.6% of its 13F portfolio. Coming in second is Pentwater Capital Management, led by Matthew Halbower, holding a $598.7 million position; 6.4% of its 13F portfolio is allocated to the stock. Some other members of the smart money that hold long positions include Jim Simons's Renaissance Technologies, John Paulson's Paulson & Co and Israel Englander's Millennium Management.

As aggregate interest increased, key hedge funds have been driving this bullishness. Empyrean Capital Partners, managed by Michael A. Price and Amos Meron, assembled the most valuable position in Allergan plc (NYSE:AGN). Empyrean Capital Partners had $172 million invested in the company at the end of the quarter. OZ Management also made a $150.9 million investment in the stock during the quarter. The following funds were also among the new AGN investors: Robert Emil Zoellner's Alpine Associates, Stephen DuBois's Camber Capital Management, and Carl Tiedemann and Michael Tiedemann's TIG Advisors.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Allergan plc (NYSE:AGN) but similarly valued. These stocks are Crown Castle International Corp. (NYSE:CCI), Takeda Pharmaceutical Company Limited (NYSE:TAK), Northrop Grumman Corporation (NYSE:NOC), and Zoetis Inc (NYSE:ZTS). This group of stocks' market caps match AGN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CCI,33,1910373,-2 TAK,27,1289782,-8 NOC,37,600316,2 ZTS,40,2060753,3 Average,34.25,1465306,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $1465 million. That figure was $6168 million in AGN's case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE:TAK) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Allergan plc (NYSE:AGN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AGN wasn't nearly as successful as these 20 stocks as the stock returned 1% during the third quarter and underperformed the market. These types of returns are normal for merger arbitrage stocks though. 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 in Q3.

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

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