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Hedge Funds Are Souring On bluebird bio Inc (BLUE)

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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards bluebird bio Inc (NASDAQ:BLUE).

Is bluebird bio Inc (NASDAQ:BLUE) an attractive stock to buy now? Investors who are in the know were in a pessimistic mood. The number of long hedge fund positions were cut by 1 recently. bluebird bio Inc (NASDAQ:BLUE) was in 27 hedge funds' portfolios at the end of March. The all time high for this statistic is 38. Our calculations also showed that BLUE isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

John Petry Sessa Capital
John Petry Sessa Capital

John Petry of Sessa Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, economists warn of inflation flare up. So, we are checking out this backdoor gold play that has hit peak gains of 718% in a little over a year. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let's take a peek at the key hedge fund action encompassing bluebird bio Inc (NASDAQ:BLUE).

Do Hedge Funds Think BLUE Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the fourth quarter of 2020. On the other hand, there were a total of 27 hedge funds with a bullish position in BLUE a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Among these funds, Armistice Capital held the most valuable stake in bluebird bio Inc (NASDAQ:BLUE), which was worth $59.2 million at the end of the fourth quarter. On the second spot was Suvretta Capital Management which amassed $39.3 million worth of shares. Camber Capital Management, Sessa Capital, and Deerfield 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 Armistice Capital allocated the biggest weight to bluebird bio Inc (NASDAQ:BLUE), around 1.36% of its 13F portfolio. Birchview Capital is also relatively very bullish on the stock, designating 1.35 percent of its 13F equity portfolio to BLUE.

Judging by the fact that bluebird bio Inc (NASDAQ:BLUE) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedgies that slashed their full holdings last quarter. At the top of the heap, Eli Casdin's Casdin Capital dropped the largest position of all the hedgies watched by Insider Monkey, totaling an estimated $39.6 million in stock, and Renaissance Technologies was right behind this move, as the fund dropped about $26.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as bluebird bio Inc (NASDAQ:BLUE) but similarly valued. These stocks are Talend S.A. (NASDAQ:TLND), Prelude Therapeutics Incorporated (NASDAQ:PRLD), NMI Holdings Inc (NASDAQ:NMIH), Holly Energy Partners, L.P. (NYSE:HEP), Cohu, Inc. (NASDAQ:COHU), B&G Foods, Inc. (NYSE:BGS), and Two Harbors Investment Corp (NYSE:TWO). This group of stocks' market values resemble BLUE's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TLND,45,1142089,18 PRLD,7,1340901,-1 NMIH,25,262921,3 HEP,2,3616,-1 COHU,25,222669,12 BGS,10,23184,-5 TWO,32,200483,14 Average,20.9,456552,5.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.9 hedge funds with bullish positions and the average amount invested in these stocks was $457 million. That figure was $226 million in BLUE's case. Talend S.A. (NASDAQ:TLND) is the most popular stock in this table. On the other hand Holly Energy Partners, L.P. (NYSE:HEP) is the least popular one with only 2 bullish hedge fund positions. bluebird bio Inc (NASDAQ:BLUE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BLUE is 54.4. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through July 9th and beat the market again by 6.7 percentage points. Unfortunately BLUE wasn't nearly as popular as these 5 stocks and hedge funds that were betting on BLUE were disappointed as the stock returned 1.4% since the end of March (through 7/9) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.