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Did Hedge Funds Drop The Ball On Hutchison China MediTech Limited (HCM) ?

“Market conditions are changing. The continued rise in interest rates suggests we are in the early stages of a bond bear market, which could intensify as central banks withdraw liquidity. The receding tide of liquidity will start to reveal more rocks beyond what has been exposed in emerging markets so far, and the value of a value discipline will be in avoiding the biggest capital-destroying rocks. If a rock emerges on the crowded shore of U.S. momentum, it could result in a major liquidity challenge, as momentum is often most intense on the downside as a crowded trade reverses. So investors are facing a large potential trade-off right now: continue to bet on the current dominance of momentum and the S&P 500, or bet on change and take an active value bet in names with attractive value and optionality, but with negative momentum,” said Clearbridge Investments in its market commentary. We aren’t sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Hutchison China MediTech Limited (NASDAQ:HCM).

Hutchison China MediTech Limited (NASDAQ:HCM) investors should pay attention to a decrease in hedge fund interest in recent months. HCM was in 5 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 9 hedge funds in our database with HCM holdings at the end of the previous quarter. Our calculations also showed that HCM isn’t among the 30 most popular stocks among hedge funds.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Sander Gerber of Hudson Bay Capital

We’re going to take a look at the fresh hedge fund action encompassing Hutchison China MediTech Limited (NASDAQ:HCM).

What have hedge funds been doing with Hutchison China MediTech Limited (NASDAQ:HCM)?

At the end of the fourth quarter, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -44% from the second quarter of 2018. On the other hand, there were a total of 11 hedge funds with a bullish position in HCM a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

HCM_apr2019

Among these funds, Prince Street Capital Management held the most valuable stake in Hutchison China MediTech Limited (NASDAQ:HCM), which was worth $1.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $1.8 million worth of shares. Moreover, Sectoral Asset Management, McKinley Capital Management, and Hudson Bay Capital Management were also bullish on Hutchison China MediTech Limited (NASDAQ:HCM), allocating a large percentage of their portfolios to this stock.

Due to the fact that Hutchison China MediTech Limited (NASDAQ:HCM) has witnessed a decline in interest from the smart money, it’s safe to say that there is a sect of funds that decided to sell off their full holdings heading into Q3. It’s worth mentioning that Israel Englander’s Millennium Management dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, worth about $6.9 million in stock. Philippe Jabre’s fund, Jabre Capital Partners, also said goodbye to its stock, about $0.3 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 4 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Hutchison China MediTech Limited (NASDAQ:HCM) but similarly valued. We will take a look at Holly Energy Partners, L.P. (NYSE:HEP), MFA Financial, Inc. (NYSE:MFA), Sprouts Farmers Market Inc (NASDAQ:SFM), and Intelsat S.A. (NYSE:I). All of these stocks’ market caps are similar to HCM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HEP 2 2881 -1
MFA 18 177049 4
SFM 22 305953 3
I 42 946955 5
Average 21 358210 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $358 million. That figure was $5 million in HCM’s case. Intelsat S.A. (NYSE:I) is the most popular stock in this table. On the other hand Holly Energy Partners, L.P. (NYSE:HEP) is the least popular one with only 2 bullish hedge fund positions. Hutchison China MediTech Limited (NASDAQ:HCM) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on HCM as the stock returned 31.8% and outperformed the market by an even larger margin.

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

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