How do you pick the next stock to invest in? One way would be to spend hours 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 Lannett Company, Inc. (NYSE:LCI).
Hedge fund interest in Lannett Company, Inc. (NYSE:LCI) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as iRadimed Corporation (NASDAQ:IRMD), Republic First Bancorp, Inc. (NASDAQ:FRBK), and Brightcove Inc (NASDAQ:BCOV) to gather more data points.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_745225" align="aligncenter" width="473"] Noam Gottesman, GLG Partners[/caption]
We're going to take a glance at the key hedge fund action encompassing Lannett Company, Inc. (NYSE:LCI).
How have hedgies been trading Lannett Company, Inc. (NYSE:LCI)?
At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2018. By comparison, 9 hedge funds held shares or bullish call options in LCI a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, D E Shaw, managed by D. E. Shaw, holds the biggest position in Lannett Company, Inc. (NYSE:LCI). D E Shaw has a $24.5 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On D E Shaw's heels is Millennium Management, managed by Israel Englander, which holds a $5.5 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors with similar optimism encompass Ken Griffin's Citadel Investment Group, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Noam Gottesman's GLG Partners.
Because Lannett Company, Inc. (NYSE:LCI) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of money managers that elected to cut their full holdings last quarter. At the top of the heap, D. E. Shaw's D E Shaw cut the largest position of the "upper crust" of funds monitored by Insider Monkey, worth about $0.4 million in stock, and Mike Vranos's Ellington was right behind this move, as the fund said goodbye to about $0.1 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Lannett Company, Inc. (NYSE:LCI) but similarly valued. We will take a look at iRadimed Corporation (NASDAQ:IRMD), Republic First Bancorp, Inc. (NASDAQ:FRBK), Brightcove Inc (NASDAQ:BCOV), and Minerva Neurosciences, Inc (NASDAQ:NERV). This group of stocks' market values are closest to LCI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IRMD,8,14555,0 FRBK,6,5266,1 BCOV,15,113587,-1 NERV,11,34144,1 Average,10,41888,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $44 million in LCI's case. Brightcove Inc (NASDAQ:BCOV) is the most popular stock in this table. On the other hand Republic First Bancorp, Inc. (NASDAQ:FRBK) is the least popular one with only 6 bullish hedge fund positions. Lannett Company, Inc. (NYSE:LCI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately LCI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LCI investors were disappointed as the stock returned -27.8% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.