There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don't cover. Because of Carl Icahn and other elite funds' exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze Taro Pharmaceutical Industries Ltd. (NYSE:TARO).
Taro Pharmaceutical Industries Ltd. (NYSE:TARO) investors should be aware of an increase in hedge fund sentiment lately. Our calculations also showed that TARO isn't among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? 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.
We're going to take a look at the recent hedge fund action surrounding Taro Pharmaceutical Industries Ltd. (NYSE:TARO).
What does smart money think about Taro Pharmaceutical Industries Ltd. (NYSE:TARO)?
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 25% from one quarter earlier. By comparison, 10 hedge funds held shares or bullish call options in TARO a year ago. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Taro Pharmaceutical Industries Ltd. (NYSE:TARO), with a stake worth $46.1 million reported as of the end of March. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $18 million. Citadel Investment Group, D E Shaw, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
As aggregate interest increased, some big names have jumped into Taro Pharmaceutical Industries Ltd. (NYSE:TARO) headfirst. Element Capital Management, managed by Jeffrey Talpins, assembled the most outsized position in Taro Pharmaceutical Industries Ltd. (NYSE:TARO). Element Capital Management had $0.5 million invested in the company at the end of the quarter. Peter Algert and Kevin Coldiron's Algert Coldiron Investors also made a $0.4 million investment in the stock during the quarter. The only other fund with a new position in the stock is Bruce Kovner's Caxton Associates LP.
Let's now review hedge fund activity in other stocks similar to Taro Pharmaceutical Industries Ltd. (NYSE:TARO). These stocks are The Goodyear Tire & Rubber Company (NASDAQ:GT), TriNet Group Inc (NYSE:TNET), Commscope Holding Company Inc (NASDAQ:COMM), and Spire Inc. (NYSE:SR). All of these stocks' market caps resemble TARO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GT,19,348140,-11 TNET,24,416936,7 COMM,23,1123484,-5 SR,15,100138,2 Average,20.25,497175,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $497 million. That figure was $74 million in TARO's case. TriNet Group Inc (NYSE:TNET) is the most popular stock in this table. On the other hand Spire Inc. (NYSE:SR) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is even less popular than SR. Hedge funds dodged a bullet by taking a bearish stance towards TARO. Our calculations showed that the top 20 most popular hedge fund stocks returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately TARO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TARO investors were disappointed as the stock returned -18.1% during the same time frame 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 the second quarter.
Disclosure: None. This article was originally published at Insider Monkey.