The hedge fund industry has been underperforming the broader market lately, following the losses registered by some hedge fund darlings like Valeant Pharmaceuticals Intl Inc (NYSE:VRX) or Sunedison Inc (OTCMKTS:SUNEQ). The Eurekahedge Hedge Fund Index registered gains of 4.53% in 2016, which though is better than the previous year’s return of 1.85%, is still lower than the S&P 500, which advanced by some 10%. However, this doesn’t mean that hedge funds are not worth following, since historically they have proven themselves to be great stock pickers, which is backed by our research.
We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively the most bullish on. Over the past year, this strategy generated returns of 39.7%, topping the 24.1% gain registered by S&P 500 ETFs. Insider Monkey’s enhanced small-cap strategy registered gains of more than 45% over the last 12 months and outperformed SPY by more than 30 percentage points in the last 4.5 years (see details here).
Every quarter we analyze the 13F filings posted by these investors and identify their collective sentiment towards thousands of stocks. This allows us to rank stocks based on their popularity and also identify patterns, like industries or sectors that saw an inflow or outflow of smart money during a particular quarter. For example, what we observed is that hedge funds expressed a particular interest towards financial stocks, especially big banks, like Bank of America Corp (NYSE:BAC), which saw a considerable increase in the number of bullish investors and was the third most popular stock at the end of 2016. On the other hand, some tech stocks like Amazon.com, Inc. (NASDAQ:AMZN) registered a drop in popularity.
With this in mind, let’s take a closer look at the five companies that were the most popular among the investors in our database heading into 2017.