Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 Catalent Inc (NYSE:CTLT).
Is Catalent Inc (NYSE:CTLT) a bargain? The smart money is getting less optimistic. The number of bullish hedge fund bets dropped by 8 in recent months. Our calculations also showed that CTLT isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
To most traders, hedge funds are seen as slow, outdated financial tools of the past. While there are more than 8000 funds with their doors open at present, Our researchers look at the crème de la crème of this group, about 850 funds. These investment experts control most of the hedge fund industry's total asset base, and by observing their first-class stock picks, Insider Monkey has formulated a number of investment strategies that have historically outperformed the broader indices. Insider Monkey's flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .
[caption id="attachment_26082" align="aligncenter" width="400"] Andreas Halvorsen of Viking Global[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now we're going to go over the recent hedge fund action regarding Catalent Inc (NYSE:CTLT).
What does smart money think about Catalent Inc (NYSE:CTLT)?
Heading into the first quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -28% from the previous quarter. On the other hand, there were a total of 19 hedge funds with a bullish position in CTLT a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in Catalent Inc (NYSE:CTLT) was held by Viking Global, which reported holding $76.5 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $68.7 million position. Other investors bullish on the company included Alyeska Investment Group, D E Shaw, and Highline Capital Management. In terms of the portfolio weights assigned to each position Highline Capital Management allocated the biggest weight to Catalent Inc (NYSE:CTLT), around 5.27% of its 13F portfolio. Atika Capital is also relatively very bullish on the stock, dishing out 1.22 percent of its 13F equity portfolio to CTLT.
Judging by the fact that Catalent Inc (NYSE:CTLT) has faced a decline in interest from the aggregate hedge fund industry, it's easy to see that there is a sect of hedgies that decided to sell off their full holdings last quarter. Intriguingly, Renaissance Technologies said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, worth close to $24.4 million in stock. Ken Fisher's fund, Fisher Asset Management, also said goodbye to its stock, about $5.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 8 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Catalent Inc (NYSE:CTLT) but similarly valued. We will take a look at Voya Financial Inc (NYSE:VOYA), Zayo Group Holdings Inc (NYSE:ZAYO), The Mosaic Company (NYSE:MOS), and HollyFrontier Corporation (NYSE:HFC). This group of stocks' market caps match CTLT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VOYA,43,1130069,3 ZAYO,52,2277778,-1 MOS,29,695479,10 HFC,30,382980,-1 Average,38.5,1121577,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.5 hedge funds with bullish positions and the average amount invested in these stocks was $1122 million. That figure was $390 million in CTLT's case. Zayo Group Holdings Inc (NYSE:ZAYO) is the most popular stock in this table. On the other hand The Mosaic Company (NYSE:MOS) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks Catalent Inc (NYSE:CTLT) is even less popular than MOS. Hedge funds dodged a bullet by taking a bearish stance towards CTLT. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately CTLT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CTLT investors were disappointed as the stock returned -30.8% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in Q1. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.