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Apple Inc. (AAPL) Dethroned by Actavis plc (ACT) as Hedge Funds’ Top Stock Pick

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The first three months of 2015 had a number of interesting developments, which in one way or another had an impact on the stock markets and investors’ sentiment. US GDP growth slowed down to nearly a standstill, inching up by 0.2%, which was however impacted by bad weather and strikes at ports on the West Coast and is not viewed as a decrease in momentum by the majority of analysts. Investors are still waiting for the Federal Reserve to raise interest rates, which is not expected to happen at least until the second half of 2015. The S&P 500 inched up by around 1% in the first three months of 2015 and currently sports a median P/E of around 21.00. Moreover, there have been a number of transactions and developments that tipped investors’ sentiment regarding particular companies. As usual, after each round of 13F filings, the last of which ended on Friday, we compile the data from the equity portfolios of more than 730 investors in order to identify the stocks investors like the most, as well as companies that they are not so fond of. We also compare the popularity of stocks on a quarter-on-quarter basis to see how the opinion of investors changed throughout a particular quarter.

Hedge Fund Managers

Many consider that 13F filings cannot provide any investment opportunities, because of the maximum 45-day delay in each filing period. However, we managed to prove that it is not true as we conducted a series of backtests and used a 60-day delay to be on the safe side (read more details about piggyback investing here).  We determined that imitating a portfolio of the 15 most popular small-cap ideas among hedge funds managed to beat the S&P 500 Total Return Index by nearly one percentage point per month and generated a double-digit alpha per year between 1999 and 2012. On the other hand, the50 most popular stocks, which are mostly represented by large- and mega-cap companies underperformed the market by around seven basis points per month. Since we launched our small-cap strategy in August 2012, it has returned 139%, outperforming the S&P 500 ETF (SPY) by more than 80 percentage points.

With this in mind, let’s take a look at the top ten most popular stocks among the funds that we track as of the end of March. As has been mentioned earlier, there have been some developments that impacted the popularity of some stocks. This is the case for Actavis plc (NYSE:ACT), which managed to climb to the first position from third in the previous quarter (see the previous top 10 most popular stocks) as 157 funds reported holding in aggregate $21.97 billion worth of its stock. Therefore, investors hold nearly 19% of Actavis’ stock, as it climbed by more than 15% during the January-March period. Therefore, the number of funds with long positions in Actavis plc (NYSE:ACT) increased from 131, but the aggregate value of invested capital surged from $14.00 billion as of the end of December. One of the reasons for this popularity growth is the completed acquisition of Allergan in March, which involved a price of $129.22 in cash and 0.3683 shares of Actavis per each share of Allergan. Taking into account that the popularity of Allergan surged during the last six months of 2014 as the company was in the middle of a proxy fight with Bill Ackman‘s Pershing Square, which tried to push for a sale to Valeant Pharmaceuticals Intl Inc (NYSE:VRX), it’s not surprising that following the acquisition of Allergan, Actavis gained a number of new shareholders. For example, Pershing Square disclosed a new position of 1.35 million shares. Stephen Mandel’s Lone Pine Capital also “re-added” Actavis plc (NYSE:ACT) to its equity portfolio, reporting ownership of 1.83 million shares after selling 2.48 million shares during the last quarter of 2014 (it did not disclose holding shares of Allergan in its 13F as of the end of 2014).

Investors in Actavis plc (NYSE:ACT) have a number of things to be looking forward to. The acquisition of Allergan was the last in a line of purchases made by the Dublin-based pharmaceutical company, which is on a path to solidify its position as one of the leading pharmaceutical companies in the world, with a large portfolio of generic and original drugs. Its last financial report surprised the market with 59% annual growth in revenue and 23% growth in earnings.

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