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 Inspire Medical Systems, Inc. (NYSE:INSP) and determine whether hedge funds had an edge regarding this stock.
Inspire Medical Systems, Inc. (NYSE:INSP) was in 24 hedge funds' portfolios at the end of June. The all time high for this statistics is 25. INSP has experienced a decrease in activity from the world's largest hedge funds lately. There were 25 hedge funds in our database with INSP holdings at the end of March. Our calculations also showed that INSP 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Roberto Mignone of Bridger Management
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 analyze the recent hedge fund action regarding Inspire Medical Systems, Inc. (NYSE:INSP).
What does smart money think about Inspire Medical Systems, Inc. (NYSE:INSP)?
At Q2's end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in INSP over the last 20 quarters. With hedgies' sentiment swirling, there exists a few notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Joel Ramin's 12 West Capital Management has the largest position in Inspire Medical Systems, Inc. (NYSE:INSP), worth close to $72 million, accounting for 3.7% of its total 13F portfolio. The second largest stake is held by D E Shaw, led by D. E. Shaw, holding a $48.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other peers with similar optimism consist of Principal Global Investors's Columbus Circle Investors, Ricky Sandler's Eminence Capital and Pasco Alfaro / Richard Tumure's Miura Global Management. In terms of the portfolio weights assigned to each position Miura Global Management allocated the biggest weight to Inspire Medical Systems, Inc. (NYSE:INSP), around 8.5% of its 13F portfolio. Pura Vida Investments is also relatively very bullish on the stock, setting aside 5.54 percent of its 13F equity portfolio to INSP.
Judging by the fact that Inspire Medical Systems, Inc. (NYSE:INSP) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there is a sect of funds who were dropping their full holdings last quarter. Intriguingly, Israel Englander's Millennium Management said goodbye to the biggest position of the "upper crust" of funds followed by Insider Monkey, totaling close to $7.6 million in stock, and Jerome Pfund and Michael Sjostrom's Sectoral Asset Management was right behind this move, as the fund dumped about $6.8 million worth. These moves are important to note, as total hedge fund interest was cut by 1 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to Inspire Medical Systems, Inc. (NYSE:INSP). We will take a look at PacWest Bancorp (NASDAQ:PACW), Compania de Minas Buenaventura S.A.A. (NYSE:BVN), South Jersey Industries Inc (NYSE:SJI), HB Fuller Co (NYSE:FUL), Focus Financial Partners Inc. (NASDAQ:FOCS), The Brink's Company (NYSE:BCO), and Fabrinet (NYSE:FN). This group of stocks' market caps are closest to INSP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PACW,24,235216,1 BVN,7,82182,-2 SJI,14,87528,1 FUL,10,140210,-8 FOCS,9,61281,2 BCO,25,255601,1 FN,23,120739,1 Average,16,140394,-0.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $140 million. That figure was $449 million in INSP's case. The Brink's Company (NYSE:BCO) is the most popular stock in this table. On the other hand Compania de Minas Buenaventura S.A.A. (NYSE:BVN) is the least popular one with only 7 bullish hedge fund positions. Inspire Medical Systems, Inc. (NYSE:INSP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for INSP is 80. 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. 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 still beat the market by 17.7 percentage points. Hedge funds were also right about betting on INSP as the stock returned 46.4% during Q3 (through September 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.