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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 (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is Zai Lab Limited (NASDAQ:ZLAB) 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.
Is Zai Lab Limited (NASDAQ:ZLAB) a buy here? The smart money is turning bullish. The number of long hedge fund bets rose by 5 recently. Our calculations also showed that ZLAB 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).
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 S&P 500 ETFs by more than 41 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 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_364887" align="aligncenter" width="400"]
Kris Jenner of Rock Springs Capital Management[/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. With all of this in mind we're going to take a glance at the recent hedge fund action surrounding Zai Lab Limited (NASDAQ:ZLAB).
What does smart money think about Zai Lab Limited (NASDAQ:ZLAB)?
Heading into the first quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the third quarter of 2019. On the other hand, there were a total of 16 hedge funds with a bullish position in ZLAB a year ago. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
The largest stake in Zai Lab Limited (NASDAQ:ZLAB) was held by Segantii Capital, which reported holding $140 million worth of stock at the end of September. It was followed by Hillhouse Capital Management with a $33.2 million position. Other investors bullish on the company included Rock Springs Capital Management, Indus Capital, and OrbiMed Advisors. In terms of the portfolio weights assigned to each position Segantii Capital allocated the biggest weight to Zai Lab Limited (NASDAQ:ZLAB), around 10.18% of its 13F portfolio. Indus Capital is also relatively very bullish on the stock, earmarking 4.41 percent of its 13F equity portfolio to ZLAB.
As industrywide interest jumped, key money managers have been driving this bullishness. Clough Capital Partners, managed by Charles Clough, established the most valuable position in Zai Lab Limited (NASDAQ:ZLAB). Clough Capital Partners had $8.9 million invested in the company at the end of the quarter. David Halpert's Prince Street Capital Management also initiated a $8.8 million position during the quarter. The other funds with new positions in the stock are Schonfeld Strategic Advisors, Panayotis Takis Sparaggis's Alkeon Capital Management, and Anand Parekh's Alyeska Investment Group.
Let's check out hedge fund activity in other stocks similar to Zai Lab Limited (NASDAQ:ZLAB). These stocks are Sensient Technologies Corporation (NYSE:SXT), Piedmont Office Realty Trust, Inc. (NYSE:PDM), EQT Corporation (NYSE:EQT), and Emergent Biosolutions Inc (NYSE:EBS). This group of stocks' market values match ZLAB's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SXT,20,56525,3 PDM,11,97488,2 EQT,29,368457,-7 EBS,12,122641,-7 Average,18,161278,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $161 million. That figure was $351 million in ZLAB's case. EQT Corporation (NYSE:EQT) is the most popular stock in this table. On the other hand Piedmont Office Realty Trust, Inc. (NYSE:PDM) is the least popular one with only 11 bullish hedge fund positions. Zai Lab Limited (NASDAQ:ZLAB) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. Hedge funds were also right about betting on ZLAB as the stock returned 23.7% during the first quarter (through March 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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.