U.S. Markets closed

Taro Pharmaceutical Industries Ltd. (TARO): Hedge Funds In Wait-and-See Mode

Reymerlyn Martin

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. 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 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Taro Pharmaceutical Industries Ltd. (NYSE:TARO) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of the third quarter of 2019. 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 Albany International Corp. (NYSE:AIN), Sensient Technologies Corporation (NYSE:SXT), and LiveRamp Holdings, Inc. (NYSE:RAMP) to gather more data points. Our calculations also showed that TARO 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.

5 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_26340" align="aligncenter" width="594"] Ken Griffin of Citadel Investment Group[/caption]

CITADEL INVESTMENT GROUP

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy  based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We're going to take a peek at the latest hedge fund action surrounding Taro Pharmaceutical Industries Ltd. (NYSE:TARO).

What have hedge funds been doing with Taro Pharmaceutical Industries Ltd. (NYSE:TARO)?

Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TARO over the last 17 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Taro Pharmaceutical Industries Ltd. (NYSE:TARO), which was worth $43.9 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $10.4 million worth of shares. Millennium Management, Citadel Investment Group, and D E Shaw 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 Algert Coldiron Investors allocated the biggest weight to Taro Pharmaceutical Industries Ltd. (NYSE:TARO), around 0.59% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, dishing out 0.48 percent of its 13F equity portfolio to TARO.

Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Taro Pharmaceutical Industries Ltd. (NYSE:TARO) but similarly valued. We will take a look at Albany International Corp. (NYSE:AIN), Sensient Technologies Corporation (NYSE:SXT), LiveRamp Holdings, Inc. (NYSE:RAMP), and Global Blood Therapeutics Inc (NASDAQ:GBT). This group of stocks' market values match TARO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AIN,12,82477,-3 SXT,15,69055,3 RAMP,17,199071,-5 GBT,24,543271,-6 Average,17,223469,-2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $223 million. That figure was $77 million in TARO's case. Global Blood Therapeutics Inc (NASDAQ:GBT) is the most popular stock in this table. On the other hand Albany International Corp. (NYSE:AIN) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is even less popular than AIN. Hedge funds clearly dropped the ball on TARO as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on TARO as the stock returned 28.2% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.

Related Content