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Did Hedge Funds Drop The Ball On Taro Pharmaceutical Industries Ltd. (TARO)?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global 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) investors should be aware of a decrease in hedge fund interest lately. TARO was in 8 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 14 hedge funds in our database with TARO holdings at the end of the previous quarter. Our calculations also showed that taro isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

MILLENNIUM MANAGEMENT

We’re going to take a peek at the key hedge fund action regarding Taro Pharmaceutical Industries Ltd. (NYSE:TARO).

Hedge fund activity in Taro Pharmaceutical Industries Ltd. (NYSE:TARO)

At Q4’s end, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -43% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in TARO over the last 14 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds With TARO Positions

Among these funds, Renaissance Technologies held the most valuable stake in Taro Pharmaceutical Industries Ltd. (NYSE:TARO), which was worth $32.2 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $16.2 million worth of shares. Moreover, Citadel Investment Group, D E Shaw, and Millennium Management were also bullish on Taro Pharmaceutical Industries Ltd. (NYSE:TARO), allocating a large percentage of their portfolios to this stock.

Due to the fact that Taro Pharmaceutical Industries Ltd. (NYSE:TARO) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of money managers that slashed their positions entirely in the third quarter. Intriguingly, Noam Gottesman’s GLG Partners dumped the biggest position of the 700 funds tracked by Insider Monkey, worth about $3.7 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also said goodbye to its stock, about $0.7 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 6 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Taro Pharmaceutical Industries Ltd. (NYSE:TARO). We will take a look at Graphic Packaging Holding Company (NYSE:GPK), OneMain Holdings Inc (NYSE:OMF), Associated Banc-Corp (NYSE:ASB), and Horizon Pharma plc (NASDAQ:HZNP). This group of stocks’ market values are similar to TARO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GPK 20 636989 -5
OMF 22 239773 -4
ASB 18 220502 1
HZNP 28 872682 7
Average 22 492487 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $492 million. That figure was $61 million in TARO’s case. Horizon Pharma plc (NASDAQ:HZNP) is the most popular stock in this table. On the other hand Associated Banc-Corp (NYSE:ASB) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is even less popular than ASB. 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 TARO, though not to the same extent, as the stock returned 24.1% and outperformed the market as well.

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

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