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Were Hedge Funds Right About Fleeing From Illumina, Inc. (ILMN)?

Reymerlyn Martin

How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Illumina, Inc. (NASDAQ:ILMN).

Illumina, Inc. (NASDAQ:ILMN) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. Our calculations also showed that ILMN isn't among the 30 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 market by 32 percentage points since May 2014 through March 12, 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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Andreas Halvorsen

Let's go over the key hedge fund action surrounding Illumina, Inc. (NASDAQ:ILMN).

How are hedge funds trading Illumina, Inc. (NASDAQ:ILMN)?

Heading into the first quarter of 2019, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from one quarter earlier. By comparison, 35 hedge funds held shares or bullish call options in ILMN a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

ILMN_mar2019

Among these funds, Viking Global held the most valuable stake in Illumina, Inc. (NASDAQ:ILMN), which was worth $343.1 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $116.6 million worth of shares. Moreover, Arrowstreet Capital, Millennium Management, and OrbiMed Advisors were also bullish on Illumina, Inc. (NASDAQ:ILMN), allocating a large percentage of their portfolios to this stock.

Judging by the fact that Illumina, Inc. (NASDAQ:ILMN) has faced a decline in interest from hedge fund managers, it's easy to see that there exists a select few hedgies that decided to sell off their entire stakes by the end of the third quarter. Interestingly, Clint Carlson's Carlson Capital dumped the largest stake of the "upper crust" of funds watched by Insider Monkey, worth close to $16.6 million in stock. Nick Niell's fund, Arrowgrass Capital Partners, also sold off its stock, about $13 million worth. These transactions are important to note, as total hedge fund interest was cut by 1 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Illumina, Inc. (NASDAQ:ILMN) but similarly valued. These stocks are Telefonica S.A. (NYSE:TEF), Raytheon Company (NYSE:RTN), Exelon Corporation (NYSE:EXC), and Orange (NYSE:ORAN). This group of stocks' market caps are similar to ILMN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TEF,6,47943,1 RTN,38,1601576,3 EXC,33,2059393,0 ORAN,2,398,1 Average,19.75,927328,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $927 million. That figure was $1091 million in ILMN's case. Raytheon Company (NYSE:RTN) is the most popular stock in this table. On the other hand Orange (NYSE:ORAN) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Illumina, Inc. (NASDAQ:ILMN) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately ILMN wasn't in this group. Hedge funds that bet on ILMN were disappointed as the stock returned 3.3% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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