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Hedge Funds Have Never Been This Bullish On Castlight Health Inc (CSLT)

Asma UL Husna

Is Castlight Health Inc (NYSE:CSLT) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Castlight Health Inc (NYSE:CSLT) investors should be aware of an increase in hedge fund interest of late. Our calculations also showed that CSLT isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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_26388" align="aligncenter" width="468"] Lee Ainslie of Maverick Capital[/caption]

Lee Ainslie MAVERICK CAPITAL

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 go over the new hedge fund action regarding Castlight Health Inc (NYSE:CSLT).

How are hedge funds trading Castlight Health Inc (NYSE:CSLT)?

At Q3's end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 19% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in CSLT a year ago. With hedgies' capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Among these funds, Raging Capital Management held the most valuable stake in Castlight Health Inc (NYSE:CSLT), which was worth $7.3 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $3 million worth of shares. Renaissance Technologies, Maverick Capital, and AQR 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 Raging Capital Management allocated the biggest weight to Castlight Health Inc (NYSE:CSLT), around 1.18% of its 13F portfolio. Concourse Capital Management is also relatively very bullish on the stock, designating 0.18 percent of its 13F equity portfolio to CSLT.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls' herd. Raging Capital Management, managed by William C. Martin, assembled the most outsized position in Castlight Health Inc (NYSE:CSLT). Raging Capital Management had $7.3 million invested in the company at the end of the quarter. Eric Singer's VIEX Capital Advisors also initiated a $0.2 million position during the quarter. The other funds with new positions in the stock are Donald Sussman's Paloma Partners, Roger Ibbotson's Zebra Capital Management, and Michael Gelband's ExodusPoint Capital.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Castlight Health Inc (NYSE:CSLT) but similarly valued. We will take a look at Alexco Resource Corp. (NYSE:AXU), Bicycle Therapeutics plc (NASDAQ:BCYC), KLX Energy Services Holdings, Inc. (NASDAQ:KLXE), and Inovio Pharmaceuticals Inc (NASDAQ:INO). All of these stocks' market caps are closest to CSLT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AXU,3,3146,-2 BCYC,6,34158,-1 KLXE,13,20213,5 INO,3,775,-2 Average,6.25,14573,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $21 million in CSLT's case. KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) is the most popular stock in this table. On the other hand Alexco Resource Corp. (NYSE:AXU) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Castlight Health Inc (NYSE:CSLT) is more popular among hedge funds. 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 CSLT wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CSLT were disappointed as the stock returned -1.4% 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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