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Did Hedge Funds Drop The Ball On American Renal Associates Holdings, Inc (NYSE:ARA) ?

With the first-quarter round of 13F filings behind us, it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was American Renal Associates Holdings, Inc (NYSE:ARA).

American Renal Associates Holdings, Inc (NYSE:ARA) investors should be aware of an increase in hedge fund interest lately. Our calculations also showed that ARA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Chuck Royce

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy  based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s take a gander at the fresh hedge fund action encompassing American Renal Associates Holdings, Inc (NYSE:ARA).

What does smart money think about American Renal Associates Holdings, Inc (NYSE:ARA)?

Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from the second quarter of 2019. By comparison, 9 hedge funds held shares or bullish call options in ARA a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Do Hedge Funds Love American Renal Associates Holdings, Inc (NYSE:ARA)?

The largest stake in American Renal Associates Holdings, Inc (NYSE:ARA) was held by Centerbridge Partners, which reported holding $111.3 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $6 million position. Other investors bullish on the company included D E Shaw, Two Sigma Advisors, and ExodusPoint Capital. In terms of the portfolio weights assigned to each position, Centerbridge Partners allocated the biggest weight to American Renal Associates Holdings, Inc (NYSE:ARA), around 20.23% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, designating 0.01 percent of its 13F equity portfolio to ARA.

As aggregate interest increased, specific money managers have been driving this bullishness. D E Shaw, managed by David E. Shaw, created the most outsized position in American Renal Associates Holdings, Inc (NYSE:ARA). D E Shaw had $0.6 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also initiated a $0.1 million position during the quarter. The only other fund with a new position in the stock is Donald Sussman’s Paloma Partners.

Let’s now take a look at hedge fund activity in other stocks similar to American Renal Associates Holdings, Inc (NYSE:ARA). These stocks are OptimizeRx Corporation (NASDAQ:OPRX), Castlight Health Inc (NYSE:CSLT), Alexco Resource Corp. (NYSEAMEX:AXU), and Bicycle Therapeutics plc (NASDAQ:BCYC). This group of stocks’ market caps match ARA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OPRX 10 33253 2
CSLT 19 21185 3
AXU 3 3146 -2
BCYC 6 34158 -1
Average 9.5 22936 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $23 million. That figure was $118 million in ARA’s case. Castlight Health Inc (NYSE:CSLT) is the most popular stock in this table. On the other hand Alexco Resource Corp. (NYSEAMEX:AXU) is the least popular one with only 3 bullish hedge fund positions. American Renal Associates Holdings, Inc (NYSE:ARA) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on ARA as the stock returned 49.7% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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