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Were Hedge Funds Right About Iridium Communications Inc. (IRDM)?

Debasis Saha

How do you pick the next stock to invest in? One way would be to spend days 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 Iridium Communications Inc. (NASDAQ:IRDM) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in Iridium Communications Inc. (NASDAQ:IRDM) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Advanced Disposal Services, Inc. (NYSE:ADSW), KBR, Inc. (NYSE:KBR), and Noble Energy, Inc. (NYSE:NBL) to gather more data points. Our calculations also showed that IRDM isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

If you'd ask most market participants, hedge funds are perceived as slow, old investment vehicles of yesteryear. While there are over 8000 funds with their doors open at present, Our researchers choose to focus on the aristocrats of this group, approximately 850 funds. It is estimated that this group of investors control the lion's share of the hedge fund industry's total asset base, and by tailing their matchless picks, Insider Monkey has deciphered several investment strategies that have historically beaten the broader indices. Insider Monkey's flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Millennium Management, Catapult Capital Management
Millennium Management, Catapult Capital Management

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we're going to check out the key hedge fund action regarding Iridium Communications Inc. (NASDAQ:IRDM).

How have hedgies been trading Iridium Communications Inc. (NASDAQ:IRDM)?

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in IRDM over the last 18 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Is IRDM A Good Stock To Buy?
Is IRDM A Good Stock To Buy?

The largest stake in Iridium Communications Inc. (NASDAQ:IRDM) was held by Select Equity Group, which reported holding $82.6 million worth of stock at the end of September. It was followed by Silver Heights Capital Management with a $51.8 million position. Other investors bullish on the company included Renaissance Technologies, Brahman Capital, and GAMCO Investors. In terms of the portfolio weights assigned to each position Silver Heights Capital Management allocated the biggest weight to Iridium Communications Inc. (NASDAQ:IRDM), around 37.61% of its 13F portfolio. Brahman Capital is also relatively very bullish on the stock, earmarking 2.93 percent of its 13F equity portfolio to IRDM.

Judging by the fact that Iridium Communications Inc. (NASDAQ:IRDM) has experienced a decline in interest from the entirety of the hedge funds we track, we can see that there exists a select few hedgies that decided to sell off their entire stakes last quarter. Intriguingly, Mika Toikka's AlphaCrest Capital Management dumped the biggest stake of the "upper crust" of funds followed by Insider Monkey, worth close to $0.6 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund cut about $0.6 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Iridium Communications Inc. (NASDAQ:IRDM) but similarly valued. We will take a look at Advanced Disposal Services, Inc. (NYSE:ADSW), KBR, Inc. (NYSE:KBR), Noble Energy, Inc. (NYSE:NBL), and Arrowhead Pharmaceuticals Inc. (NASDAQ:ARWR). This group of stocks' market valuations are similar to IRDM's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ADSW,21,739563,-1 KBR,28,424712,-1 NBL,35,382923,7 ARWR,22,160633,-4 Average,26.5,426958,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $427 million. That figure was $229 million in IRDM's case. Noble Energy, Inc. (NYSE:NBL) is the most popular stock in this table. On the other hand Advanced Disposal Services, Inc. (NYSE:ADSW) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Iridium Communications Inc. (NASDAQ:IRDM) is even less popular than ADSW. Hedge funds dodged a bullet by taking a bearish stance towards IRDM. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but managed to beat the market by 17.1 percentage points. Unfortunately IRDM wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); IRDM investors were disappointed as the stock returned 22.5% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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

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