Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds.
Is AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) a buy, sell, or hold? Hedge funds cashed out of AMAG during the second quarter. The number of bullish hedge fund positions fell by 2 in recent months. Our calculations also showed that AMAG isn't among the 30 most popular stocks among hedge funds (see the video below). AMAG was in 17 hedge funds' portfolios at the end of June. There were 19 hedge funds in our database with AMAG positions at the end of the previous quarter. This was all before Caligan Partners launched its activist campaign. We are going to get to see how hedge funds traded AMAG during Q3 in one week and publish an updated version of this article. Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. Let's go over the key hedge fund action regarding AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG).
What have hedge funds been doing with AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG)?
At the end of the second quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in AMAG over the last 16 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
[caption id="attachment_758402" align="aligncenter" width="450"] William Leland Edwards of Palo Alto Investors[/caption]
More specifically, Armistice Capital was the largest shareholder of AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG), with a stake worth $38 million reported as of the end of March. Trailing Armistice Capital was Palo Alto Investors, which amassed a stake valued at $33.7 million. Camber Capital Management, Renaissance Technologies, and D E Shaw were also very fond of the stock, giving the stock large weights in their portfolios.
Since AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there were a few money managers that elected to cut their entire stakes heading into Q3. It's worth mentioning that Michael Johnston's Steelhead Partners said goodbye to the biggest stake of all the hedgies monitored by Insider Monkey, worth about $14.8 million in stock. Noam Gottesman's fund, GLG Partners, also sold off its stock, about $2.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 2 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG). These stocks are Rimini Street, Inc. (NASDAQ:RMNI), Willis Lease Finance Corporation (NASDAQ:WLFC), Carriage Services, Inc. (NYSE:CSV), and Steel Partners Holdings LP (NYSE:SPLP). This group of stocks' market valuations are similar to AMAG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RMNI,6,12325,2 WLFC,3,28638,1 CSV,9,33467,1 SPLP,5,30602,-1 Average,5.75,26258,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.75 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $145 million in AMAG's case. Carriage Services, Inc. (NYSE:CSV) is the most popular stock in this table. On the other hand Willis Lease Finance Corporation (NASDAQ:WLFC) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on AMAG as the stock returned 15.6% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.