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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 BridgeBio Pharma, Inc. (NASDAQ:BBIO) and determine whether hedge funds had an edge regarding this stock.
Is BridgeBio Pharma, Inc. (NASDAQ:BBIO) a bargain? The best stock pickers were taking a bullish view. The number of long hedge fund bets inched up by 1 in recent months. Our calculations also showed that BBIO isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). BBIO was in 12 hedge funds' portfolios at the end of March. There were 11 hedge funds in our database with BBIO holdings at the end of the previous quarter.
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 58 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.
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Andreas Halvorsen of Viking Global[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to take a peek at the key hedge fund action encompassing BridgeBio Pharma, Inc. (NASDAQ:BBIO).
How are hedge funds trading BridgeBio Pharma, Inc. (NASDAQ:BBIO)?
At Q1's end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards BBIO over the last 18 quarters. With hedge funds' capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
The largest stake in BridgeBio Pharma, Inc. (NASDAQ:BBIO) was held by Viking Global, which reported holding $772 million worth of stock at the end of September. It was followed by Perceptive Advisors with a $194.5 million position. Other investors bullish on the company included Hillhouse Capital Management, Cormorant Asset Management, and Millennium Management. In terms of the portfolio weights assigned to each position Perceptive Advisors allocated the biggest weight to BridgeBio Pharma, Inc. (NASDAQ:BBIO), around 5.07% of its 13F portfolio. Viking Global is also relatively very bullish on the stock, designating 4.02 percent of its 13F equity portfolio to BBIO.
As aggregate interest increased, key hedge funds were breaking ground themselves. Millennium Management, managed by Israel Englander, assembled the most valuable position in BridgeBio Pharma, Inc. (NASDAQ:BBIO). Millennium Management had $6.9 million invested in the company at the end of the quarter. Andrew Weiss's Weiss Asset Management also initiated a $4.7 million position during the quarter. The other funds with brand new BBIO positions are D. E. Shaw's D E Shaw, Neil Shahrestani's Ikarian Capital, and Greg Martinez's Parkman Healthcare Partners.
Let's also examine hedge fund activity in other stocks similar to BridgeBio Pharma, Inc. (NASDAQ:BBIO). These stocks are eHealth, Inc. (NASDAQ:EHTH), Tapestry, Inc. (NYSE:TPR), AGCO Corporation (NYSE:AGCO), and TerraForm Power Inc (NASDAQ:TERP). All of these stocks' market caps are similar to BBIO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EHTH,35,411257,9 TPR,37,351229,-3 AGCO,19,125602,-9 TERP,17,217631,2 Average,27,276430,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $276 million. That figure was $1213 million in BBIO's case. Tapestry, Inc. (NYSE:TPR) is the most popular stock in this table. On the other hand TerraForm Power Inc (NASDAQ:TERP) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks BridgeBio Pharma, Inc. (NASDAQ:BBIO) is even less popular than TERP. Hedge funds dodged a bullet by taking a bearish stance towards BBIO. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately BBIO wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); BBIO investors were disappointed as the stock returned 12.4% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.