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Vertex Pharmaceuticals Incorporated (VRTX) vs. Hedge Fund Favorites in 2019

Debasis Saha

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57% each. Hedge funds' top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by nearly 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX).

Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) has experienced an increase in enthusiasm from smart money of late. VRTX was in 46 hedge funds' portfolios at the end of the third quarter of 2019. There were 40 hedge funds in our database with VRTX positions at the end of the previous quarter. Our calculations also showed that VRTX 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).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.

[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]

RENAISSANCE TECHNOLOGIES

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 as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind let's take a look at the new hedge fund action regarding Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX).

How have hedgies been trading Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)?

At Q3's end, a total of 46 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. On the other hand, there were a total of 41 hedge funds with a bullish position in VRTX a year ago. With hedgies' sentiment swirling, there exists a select group of key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Is VRTX A Good Stock To Buy?

Among these funds, Renaissance Technologies held the most valuable stake in Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), which was worth $982.5 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $153.1 million worth of shares. Adage Capital Management, OrbiMed Advisors, and Citadel Investment Group 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 Copernicus Capital Management allocated the biggest weight to Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), around 10.22% of its 13F portfolio. Healthcor Management is also relatively very bullish on the stock, designating 4.35 percent of its 13F equity portfolio to VRTX.

As one would reasonably expect, key hedge funds have been driving this bullishness. Holocene Advisors, managed by Brandon Haley, created the largest position in Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). Holocene Advisors had $74.3 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe's Voleon Capital also made a $7.5 million investment in the stock during the quarter. The following funds were also among the new VRTX investors: Matthew Hulsizer's PEAK6 Capital Management, Ray Dalio's Bridgewater Associates, and Matthew Tewksbury's Stevens Capital Management.

Let's also examine hedge fund activity in other stocks similar to Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). These stocks are Tesla Inc. (NASDAQ:TSLA), EOG Resources Inc (NYSE:EOG), Biogen Inc. (NASDAQ:BIIB), and Public Storage (NYSE:PSA). This group of stocks' market values are similar to VRTX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TSLA,28,570594,-9 EOG,48,1449930,12 BIIB,48,4207480,5 PSA,22,876105,2 Average,36.5,1776027,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.5 hedge funds with bullish positions and the average amount invested in these stocks was $1776 million. That figure was $2296 million in VRTX's case. EOG Resources Inc (NYSE:EOG) is the most popular stock in this table. On the other hand Public Storage (NYSE:PSA) is the least popular one with only 22 bullish hedge fund positions. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on VRTX, though not to the same extent, as the stock returned 32.7% during 2019 (as of 12/23) and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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