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 Mylan N.V. (NASDAQ:MYL).
Is Mylan N.V. (NASDAQ:MYL) a buy, sell, or hold? Money managers are getting more optimistic. The number of long hedge fund bets increased by 3 in recent months. Our calculations also showed that MYL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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 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_530612" align="aligncenter" width="450"] Frank Brosens of Taconic Capital[/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. Let's take a glance at the key hedge fund action surrounding Mylan N.V. (NASDAQ:MYL).
What does smart money think about Mylan N.V. (NASDAQ:MYL)?
At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from one quarter earlier. By comparison, 39 hedge funds held shares or bullish call options in MYL a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Richard S. Pzena's Pzena Investment Management has the largest position in Mylan N.V. (NASDAQ:MYL), worth close to $383.9 million, corresponding to 2.1% of its total 13F portfolio. Sitting at the No. 2 spot is Cliff Asness of AQR Capital Management, with a $329.4 million position; 0.4% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that hold long positions encompass John Paulson's Paulson & Co, Stephen DuBois's Camber Capital Management and Robert Rodriguez and Steven Romick's First Pacific Advisors. In terms of the portfolio weights assigned to each position Camber Capital Management allocated the biggest weight to Mylan N.V. (NASDAQ:MYL), around 8.84% of its portfolio. Deerfield Management is also relatively very bullish on the stock, setting aside 6.17 percent of its 13F equity portfolio to MYL.
As one would reasonably expect, key hedge funds have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the most outsized position in Mylan N.V. (NASDAQ:MYL). Arrowstreet Capital had $34.4 million invested in the company at the end of the quarter. Frank Brosens's Taconic Capital also initiated a $5.9 million position during the quarter. The other funds with new positions in the stock are Yi Xin's Ariose Capital, Bart Baum's Ionic Capital Management, and Mario Gabelli's GAMCO Investors.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Mylan N.V. (NASDAQ:MYL) but similarly valued. We will take a look at Brown & Brown, Inc. (NYSE:BRO), Tyler Technologies, Inc. (NYSE:TYL), Insulet Corporation (NASDAQ:PODD), and Altaba Inc. (NASDAQ:AABA). This group of stocks' market valuations resemble MYL's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BRO,28,810178,7 TYL,26,602875,2 PODD,37,500045,13 AABA,48,4699502,-11 Average,34.75,1653150,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 34.75 hedge funds with bullish positions and the average amount invested in these stocks was $1653 million. That figure was $1719 million in MYL's case. Altaba Inc. (NASDAQ:AABA) is the most popular stock in this table. On the other hand Tyler Technologies, Inc. (NYSE:TYL) is the least popular one with only 26 bullish hedge fund positions. Mylan N.V. (NASDAQ:MYL) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MYL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MYL investors were disappointed as the stock returned -5.1% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.