Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57%. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 41.3% in 2019 and outperformed the broader market benchmark by 10.1 percentage points. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Masimo Corporation (NASDAQ:MASI) going to take off soon? Money managers are getting less optimistic. The number of long hedge fund positions retreated by 1 recently. Our calculations also showed that MASI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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_746893" align="aligncenter" width="1613"] Paul Marshall of Marshall Wace[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now we're going to take a look at the recent hedge fund action encompassing Masimo Corporation (NASDAQ:MASI).
How are hedge funds trading Masimo Corporation (NASDAQ:MASI)?
At Q3's end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. On the other hand, there were a total of 28 hedge funds with a bullish position in MASI a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
Among these funds, AQR Capital Management held the most valuable stake in Masimo Corporation (NASDAQ:MASI), which was worth $76.9 million at the end of the third quarter. On the second spot was GLG Partners which amassed $23.7 million worth of shares. Renaissance Technologies, GAMCO Investors, and Marshall Wace 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 Pura Vida Investments allocated the biggest weight to Masimo Corporation (NASDAQ:MASI), around 1.05% of its 13F portfolio. Birchview Capital is also relatively very bullish on the stock, designating 0.79 percent of its 13F equity portfolio to MASI.
Since Masimo Corporation (NASDAQ:MASI) has experienced bearish sentiment from the smart money, logic holds that there was a specific group of hedge funds that slashed their full holdings last quarter. Intriguingly, Robert B. Gillam's McKinley Capital Management sold off the largest position of the 750 funds monitored by Insider Monkey, valued at close to $3.4 million in stock. Michael Gelband's fund, ExodusPoint Capital, also said goodbye to its stock, about $1.7 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 1 funds last quarter.
Let's check out hedge fund activity in other stocks similar to Masimo Corporation (NASDAQ:MASI). These stocks are Newell Brands Inc. (NASDAQ:NWL), China Eastern Airlines Corp. Ltd. (NYSE:CEA), The Mosaic Company (NYSE:MOS), and Universal Display Corporation (NASDAQ:OLED). This group of stocks' market valuations are similar to MASI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NWL,29,1434678,0 CEA,1,657,0 MOS,17,682952,-11 OLED,23,231521,6 Average,17.5,587452,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $587 million. That figure was $201 million in MASI's case. Newell Brands Inc. (NASDAQ:NWL) is the most popular stock in this table. On the other hand China Eastern Airlines Corp. Ltd. (NYSE:CEA) is the least popular one with only 1 bullish hedge fund positions. Masimo Corporation (NASDAQ:MASI) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on MASI as the stock returned 47.2% in 2019 and outperformed the market. Hedge funds were rewarded for their relative bullishness. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.