"The end to the U.S. Government shutdown, reports of progress on China-U.S. trade talks, and the Federal Reserve’s confirmation that it did not plan further interest rate hikes in 2019 allayed investor fears and drove U.S. markets substantially higher in the first quarter of the year. Global markets followed suit pretty much across the board delivering what some market participants described as a “V-shaped” recovery," This is how Evermore Global Value summarized the first quarter in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.
Hedge fund interest in Intercept Pharmaceuticals Inc (NASDAQ:ICPT) 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 The Timken Company (NYSE:TKR), Paramount Group Inc (NYSE:PGRE), and Perspecta Inc. (NYSE:PRSP) to gather more data points.
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.
Let's take a gander at the key hedge fund action regarding Intercept Pharmaceuticals Inc (NASDAQ:ICPT).
What have hedge funds been doing with Intercept Pharmaceuticals Inc (NASDAQ:ICPT)?
Heading into the second quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ICPT over the last 15 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
More specifically, Citadel Investment Group was the largest shareholder of Intercept Pharmaceuticals Inc (NASDAQ:ICPT), with a stake worth $75.4 million reported as of the end of March. Trailing Citadel Investment Group was Rima Senvest Management, which amassed a stake valued at $74.1 million. Point72 Asset Management, Adage Capital Management, and Sarissa Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Intercept Pharmaceuticals Inc (NASDAQ:ICPT) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there exists a select few funds who sold off their entire stakes by the end of the third quarter. At the top of the heap, Benjamin A. Smith's Laurion Capital Management said goodbye to the biggest investment of the "upper crust" of funds tracked by Insider Monkey, totaling close to $24.1 million in call options. Samuel Isaly's fund, OrbiMed Advisors, also sold off its call options, about $6.7 million worth. These transactions are interesting, 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 Intercept Pharmaceuticals Inc (NASDAQ:ICPT) but similarly valued. We will take a look at The Timken Company (NYSE:TKR), Paramount Group Inc (NYSE:PGRE), Perspecta Inc. (NYSE:PRSP), and Ryder System, Inc. (NYSE:R). This group of stocks' market valuations are closest to ICPT's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TKR,26,288105,1 PGRE,16,236374,2 PRSP,34,645903,-3 R,19,380483,0 Average,23.75,387716,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $388 million. That figure was $386 million in ICPT's case. Perspecta Inc. (NYSE:PRSP) is the most popular stock in this table. On the other hand Paramount Group Inc (NYSE:PGRE) is the least popular one with only 16 bullish hedge fund positions. Intercept Pharmaceuticals Inc (NASDAQ:ICPT) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately ICPT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ICPT investors were disappointed as the stock returned -25% 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.