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Zai Lab Limited (ZLAB): Are Hedge Funds Right About This Stock?

Reymerlyn Martin

While the market driven by short-term sentiment influenced by uncertainty regarding the future of the interest rate environment in the US, declining oil prices and the trade war with China, many smart money investors are keeping their optimism regarding the current bull run, while still hedging many of their long positions. However, as we know, big investors usually buy stocks with strong fundamentals, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Zai Lab Limited (NASDAQ:ZLAB).

Zai Lab Limited (NASDAQ:ZLAB) was in 20 hedge funds' portfolios at the end of September. ZLAB has seen an increase in support from the world's most elite money managers of late. There were 12 hedge funds in our database with ZLAB positions at the end of the previous quarter. Our calculations also showed that ZLAB isn't among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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.

Samuel Isaly - Orbimed Advisors

We're going to take a gander at the latest hedge fund action surrounding Zai Lab Limited (NASDAQ:ZLAB).

Hedge fund activity in Zai Lab Limited (NASDAQ:ZLAB)

At the end of the third quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 67% from the previous quarter. By comparison, 13 hedge funds held shares or bullish call options in ZLAB heading into this year. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

ZLAB_dec2018

The largest stake in Zai Lab Limited (NASDAQ:ZLAB) was held by Segantii Capital, which reported holding $46.7 million worth of stock at the end of September. It was followed by OrbiMed Advisors with a $34.2 million position. Other investors bullish on the company included Cormorant Asset Management, Rock Springs Capital Management, and EcoR1 Capital.

Consequently, key hedge funds have been driving this bullishness. EcoR1 Capital, managed by Oleg Nodelman, established the most outsized position in Zai Lab Limited (NASDAQ:ZLAB). EcoR1 Capital had $6.8 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace LLP also made a $5.3 million investment in the stock during the quarter. The other funds with brand new ZLAB positions are Steve Cohen's Point72 Asset Management, D. E. Shaw's D E Shaw, and Noam Gottesman's GLG Partners.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Zai Lab Limited (NASDAQ:ZLAB) but similarly valued. We will take a look at NIC Inc. (NASDAQ:EGOV), Enova International Inc (NYSE:ENVA), Kforce Inc. (NASDAQ:KFRC), and IRSA Inversiones y Representaciones Sociedad Anónima (NYSE:IRS). This group of stocks' market valuations are similar to ZLAB's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EGOV,18,69966,3 ENVA,21,187946,-1 KFRC,20,78246,4 IRS,10,57298,-2 Average,17.25,98364,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $98 million. That figure was $135 million in ZLAB's case. Enova International Inc (NYSE:ENVA) is the most popular stock in this table. On the other hand IRSA Inversiones y Representaciones Sociedad Anónima (NYSE:IRS) is the least popular one with only 10 bullish hedge fund positions. Zai Lab Limited (NASDAQ:ZLAB) 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. In this regard ENVA might be a better candidate to consider a long position.

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

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