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Hedge Funds Are Obesely Overweight These 5 Mid-caps

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Given the immense size of the broader market and the relatively small number of funds in our database (not to mention we don’t track many mutual funds or other gargantuan investment vehicles), the collection of funds that we track typically don’t have ownership of more than 20% of any given stock.

In the instance of Herbalife Ltd. (NYSE:HLF), Liberty Broadband Corp (NASDAQ:LBRDK), Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ), Cheniere Energy, Inc. (NYSEMKT:LNG), and Commscope Holding Company Inc (NASDAQ:COMM) however, the funds that we track are severely overweight those equities, even obesely so, tipping the scales at ownership of more than half of their floats in some cases. In this article, we’ll take a closer look at those five stocks and the hedge fund activity in them during the second quarter.

At Insider Monkey, we track over 700 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

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#5 Herbalife Ltd. (NYSE:HLF)

– Number of Hedge Fund Shareholders (as of June 30): 35
– Total Value of Hedge Funds’ Holdings (as of June 30): $2.62 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 48.30%

Herbalife Ltd. (NYSE:HLF) is a smart money battleground stock. On one hand, Bill Ackman‘s Pershing Square has been famously short for quite awhile, while on the other hand, 35 hedge funds in our database, including Carl Icahn‘s Icahn Capital, are long. Together, the longs’ ownership accounts for over 48% of Herbalife’s float. Although its business model is pretty controversial, Herbalife bulls received some good news in July after the company settled with the FTC over its practices, paying only $200 million in fines and adjusting its compensation structure primarily in the United States, which only accounts for around 20% of the company’s sales.

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#4 Commscope Holding Company Inc (NASDAQ:COMM)

– Number of Hedge Fund Shareholders (as of June 30): 47
– Total Value of Hedge Funds’ Holdings (as of June 30): $2.94 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 49.30%

47 funds out of the 749 in our database that filed 13F’s for the June 30 reporting period, were long Commscope Holding Company Inc (NASDAQ:COMM) at the end of June, up by 11 funds quarter-over-quarter. Collectively, those 47 funds were extremely bullish on the stock, as they owned 49.3% of Commscope’s float. Given CommScope’s 15.68% year-to-date performance, and its relatively cheap forward P/E of 10.41, it’s not that surprising that the smart money crowd is long the stock in a big way. Analysts have an average target price of $36.36 per share on it, which is more than 20% above the stock’s current price.

Three mid-cap stocks that the hedge funds in our database own more than 50% of collectively are revealed on the next page.

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