Taro Pharmaceutical Industries Ltd. (TARO): Are Hedge Funds Right To Fear This Stock?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

Taro Pharmaceutical Industries Ltd. (NYSE:TARO) was in 14 hedge funds’ portfolios at the end of September. TARO has experienced an increase in hedge fund interest lately. There were 12 hedge funds in our database with TARO holdings at the end of the previous quarter. 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 Lennox International Inc. (NYSE:LII), Reinsurance Group of America Inc (NYSE:RGA), and Mercadolibre Inc (NASDAQ:MELI) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

How have hedgies been trading Taro Pharmaceutical Industries Ltd. (NYSE:TARO)?

At Q3’s end, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a gain of 17% from the second quarter of 2016. On the other hand, there were a total of 19 hedge funds with a bullish position in TARO at the beginning of this year, so hedge fund ownership is still down substantially in 2016. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Renaissance Technologies, founded by Jim Simons, holds the biggest position in Taro Pharmaceutical Industries Ltd. (NYSE:TARO). Renaissance Technologies has a $69.6 million position in the stock. The second largest stake is held by McKinley Capital Management, led by Robert B. Gillam, which holds a $10 million position. Remaining peers that hold long positions consist of Anders Hallberg and Carl Bennet’s HealthInvest Partners AB, George Hall’s Clinton Group, and Israel Englander’s Millennium Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As aggregate interest increased, key hedge funds have been driving this bullishness. Clinton Group created the most valuable position in Taro Pharmaceutical Industries Ltd. (NYSE:TARO). Clinton Group had $6.6 million invested in the company at the end of the quarter. Millennium Management also made a $3.9 million investment in the stock during the quarter. The other funds with brand new TARO positions are Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital, Alec Litowitz and Ross Laser’s Magnetar Capital, and Matthew Hulsizer’s PEAK6 Capital Management.

Let’s now review hedge fund activity in other stocks similar to Taro Pharmaceutical Industries Ltd. (NYSE:TARO). We will take a look at Lennox International Inc. (NYSE:LII), Reinsurance Group of America Inc (NYSE:RGA), Mercadolibre Inc (NASDAQ:MELI), and Liberty Broadband Corp (NASDAQ:LBRDK). All of these stocks’ market caps are closest to TARO’s market cap.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $1.18 billion. That figure was $108 million in TARO’s case. Liberty Broadband Corp (NASDAQ:LBRDK) is the most popular stock in this table. On the other hand Lennox International Inc. (NYSE:LII) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is even less popular than LII. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None