Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX).
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) was in 40 hedge funds' portfolios at the end of the second quarter of 2019. VRTX shareholders have witnessed a decrease in support from the world's most elite money managers lately. There were 45 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 (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. 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 Q2's end, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from one quarter earlier. By comparison, 45 hedge funds held shares or bullish call options in VRTX a year ago. With hedgies' capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), which was worth $1018.8 million at the end of the second quarter. On the second spot was OrbiMed Advisors which amassed $178.5 million worth of shares. Moreover, Two Sigma Advisors, D E Shaw, and Arrowstreet Capital were also bullish on Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) has experienced falling interest from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of funds that decided to sell off their positions entirely heading into Q3. It's worth mentioning that Sander Gerber's Hudson Bay Capital Management dropped the largest investment of the 750 funds watched by Insider Monkey, comprising close to $29.4 million in stock, and Ryan Caldwell's Chiron Investment Management was right behind this move, as the fund sold off about $25.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds heading into Q3.
Let's also examine hedge fund activity in other stocks similar to Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). These stocks are Honda Motor Co Ltd (NYSE:HMC), Biogen Inc. (NASDAQ:BIIB), TC Energy Corporation (NYSE:TRP), and Vodafone Group Plc (NASDAQ:VOD). This group of stocks' market valuations resemble VRTX's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HMC,7,83951,-2 BIIB,43,3521939,-6 TRP,12,228464,0 VOD,11,448160,-7 Average,18.25,1070629,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $1071 million. That figure was $2386 million in VRTX's case. Biogen Inc. (NASDAQ:BIIB) is the most popular stock in this table. On the other hand Honda Motor Co Ltd (NYSE:HMC) is the least popular one with only 7 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. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately VRTX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on VRTX were disappointed as the stock returned -7.6% during the third quarter 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.