We are still in an overall bull market and many stocks that smart money investors were piling into surged through November 22nd. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 52% and 49% respectively. Hedge funds' top 3 stock picks returned 39.1% this year and beat the S&P 500 ETFs by nearly 13 percentage points. That's a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Eli Lilly and Company (NYSE:LLY) investors should pay attention to a decrease in hedge fund interest in recent months. LLY was in 41 hedge funds' portfolios at the end of September. There were 43 hedge funds in our database with LLY holdings at the end of the previous quarter. Our calculations also showed that LLY isn't among the 30 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_670485" align="aligncenter" width="473"] Michael Platt of BlueCrest Capital Mgmt.[/caption]
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 take a look at the latest hedge fund action regarding Eli Lilly and Company (NYSE:LLY).
What does smart money think about Eli Lilly and Company (NYSE:LLY)?
Heading into the fourth quarter of 2019, a total of 41 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LLY over the last 17 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Among these funds, Fisher Asset Management held the most valuable stake in Eli Lilly and Company (NYSE:LLY), which was worth $481.6 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $323.1 million worth of shares. Two Sigma Advisors, Arrowstreet Capital, and Point72 Asset 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 Sivik Global Healthcare allocated the biggest weight to Eli Lilly and Company (NYSE:LLY), around 3.1% of its portfolio. Huber Capital Management is also relatively very bullish on the stock, setting aside 2.09 percent of its 13F equity portfolio to LLY.
Seeing as Eli Lilly and Company (NYSE:LLY) has experienced bearish sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedgies who sold off their entire stakes in the third quarter. At the top of the heap, Benjamin A. Smith's Laurion Capital Management sold off the biggest investment of the "upper crust" of funds monitored by Insider Monkey, comprising an estimated $22.4 million in call options. David Costen Haley's fund, HBK Investments, also said goodbye to its call options, about $20.5 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 2 funds in the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Eli Lilly and Company (NYSE:LLY) but similarly valued. We will take a look at GlaxoSmithKline plc (NYSE:GSK), The Toronto-Dominion Bank (NYSE:TD), NVIDIA Corporation (NASDAQ:NVDA), and Starbucks Corporation (NASDAQ:SBUX). This group of stocks' market values match LLY's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GSK,26,1891012,1 TD,15,295029,-3 NVDA,48,1473439,3 SBUX,52,5593793,3 Average,35.25,2313318,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $2313 million. That figure was $1490 million in LLY's case. Starbucks Corporation (NASDAQ:SBUX) is the most popular stock in this table. On the other hand The Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 15 bullish hedge fund positions. Eli Lilly and Company (NYSE:LLY) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately LLY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LLY were disappointed as the stock returned 4.5% during the fourth quarter (through 11/22) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.