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Hedge Funds Are Dumping Baxter International Inc. (BAX)

Reymerlyn Martin

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Baxter International Inc. (NYSE:BAX).

Is Baxter International Inc. (NYSE:BAX) the right pick for your portfolio? The smart money is becoming less confident. The number of long hedge fund positions went down by 1 recently. Our calculations also showed that BAX isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). BAX was in 33 hedge funds' portfolios at the end of September. There were 34 hedge funds in our database with BAX holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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_25086" align="aligncenter" width="600"] Dan Loeb of Third Point[/caption]

Dan Loeb THIRD POINT

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to view the fresh hedge fund action regarding Baxter International Inc. (NYSE:BAX).

How are hedge funds trading Baxter International Inc. (NYSE:BAX)?

At Q3's end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the previous quarter. By comparison, 43 hedge funds held shares or bullish call options in BAX a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

BAX_dec2019

More specifically, Third Point was the largest shareholder of Baxter International Inc. (NYSE:BAX), with a stake worth $1473.9 million reported as of the end of September. Trailing Third Point was AQR Capital Management, which amassed a stake valued at $271.7 million. Two Sigma Advisors, Healthcor Management, and Citadel Investment Group 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 Third Point allocated the biggest weight to Baxter International Inc. (NYSE:BAX), around 17.51% of its portfolio. Healthcor Management is also relatively very bullish on the stock, dishing out 3.41 percent of its 13F equity portfolio to BAX.

Due to the fact that Baxter International Inc. (NYSE:BAX) has experienced bearish sentiment from the smart money, logic holds that there exists a select few fund managers that slashed their entire stakes in the third quarter. At the top of the heap, Dmitry Balyasny's Balyasny Asset Management dumped the biggest stake of all the hedgies watched by Insider Monkey, comprising about $99.1 million in stock, and Larry Robbins's Glenview Capital was right behind this move, as the fund said goodbye to about $17.4 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 1 funds in the third quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Baxter International Inc. (NYSE:BAX) but similarly valued. These stocks are Las Vegas Sands Corp. (NYSE:LVS), Metlife Inc (NYSE:MET), BCE Inc. (NYSE:BCE), and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). This group of stocks' market valuations resemble BAX's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LVS,39,1983338,0 MET,35,2050364,9 BCE,13,415810,-1 VRTX,46,2296101,6 Average,33.25,1686403,3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $1686 million. That figure was $2445 million in BAX's case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 13 bullish hedge fund positions. Baxter International Inc. (NYSE:BAX) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately BAX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BAX investors were disappointed as the stock returned -6.3% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.

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

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