We are still in an overall bull market and many stocks that smart money investors were piling into 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. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 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 VirnetX Holding Corporation (NYSE:VHC).
Is VirnetX Holding Corporation (NYSE:VHC) a healthy stock for your portfolio? The smart money is betting on the stock. The number of bullish hedge fund bets inched up by 1 lately. Our calculations also showed that VHC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). VHC was in 4 hedge funds' portfolios at the end of the third quarter of 2019. There were 3 hedge funds in our database with VHC holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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_258236" align="alignnone" width="600"] Ken Griffin of Citadel Investment Group[/caption]
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 review the new hedge fund action surrounding VirnetX Holding Corporation (NYSE:VHC).
Hedge fund activity in VirnetX Holding Corporation (NYSE:VHC)
Heading into the fourth quarter of 2019, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from one quarter earlier. By comparison, 2 hedge funds held shares or bullish call options in VHC a year ago. With hedgies' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the most valuable position in VirnetX Holding Corporation (NYSE:VHC). Citadel Investment Group has a $0.4 million call position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by David E. Shaw of D E Shaw, with a $0.2 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism consist of Donald Sussman's Paloma Partners, Israel Englander's Millennium Management and David Harding's Winton Capital Management. In terms of the portfolio weights assigned to each position Paloma Partners allocated the biggest weight to VirnetX Holding Corporation (NYSE:VHC), around 0.002% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, setting aside 0.0008 percent of its 13F equity portfolio to VHC.
Consequently, key money managers were breaking ground themselves. Paloma Partners, managed by Donald Sussman, established the largest position in VirnetX Holding Corporation (NYSE:VHC). Paloma Partners had $0.1 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also made a $0.1 million investment in the stock during the quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as VirnetX Holding Corporation (NYSE:VHC) but similarly valued. We will take a look at Southern National Banc. of Virginia, Inc (NASDAQ:SONA), Diplomat Pharmacy Inc (NYSE:DPLO), Spark Energy, Inc. (NASDAQ:SPKE), and Kimball Electronics Inc (NASDAQ:KE). This group of stocks' market valuations resemble VHC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SONA,9,21060,2 DPLO,10,62382,2 SPKE,8,14186,-3 KE,10,20155,1 Average,9.25,29446,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $29 million. That figure was $0 million in VHC's case. Diplomat Pharmacy Inc (NYSE:DPLO) is the most popular stock in this table. On the other hand Spark Energy, Inc. (NASDAQ:SPKE) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks VirnetX Holding Corporation (NYSE:VHC) is even less popular than SPKE. Hedge funds dodged a bullet by taking a bearish stance towards VHC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately VHC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); VHC investors were disappointed as the stock returned -34.6% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.