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Did Hedge Funds Make The Right Call On Acadia Healthcare Company Inc (ACHC) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Acadia Healthcare Company Inc (NASDAQ:ACHC) and determine whether hedge funds had an edge regarding this stock.

Acadia Healthcare Company Inc (NASDAQ:ACHC) was in 24 hedge funds’ portfolios at the end of the first quarter of 2020. ACHC investors should pay attention to a decrease in enthusiasm from smart money of late. There were 28 hedge funds in our database with ACHC holdings at the end of the previous quarter. Our calculations also showed that ACHC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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.

Didric Cederholm Lion Point Capital

Didric Cederholm of Lion Point Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to view the key hedge fund action surrounding Acadia Healthcare Company Inc (NASDAQ:ACHC).

What does smart money think about Acadia Healthcare Company Inc (NASDAQ:ACHC)?

At the end of the first quarter, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in ACHC a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in Acadia Healthcare Company Inc (NASDAQ:ACHC) was held by P2 Capital Partners, which reported holding $102.3 million worth of stock at the end of September. It was followed by Abrams Bison Investments with a $42.2 million position. Other investors bullish on the company included Lion Point, OrbiMed Advisors, and Blue Harbour Group. In terms of the portfolio weights assigned to each position Abrams Bison Investments allocated the biggest weight to Acadia Healthcare Company Inc (NASDAQ:ACHC), around 12.32% of its 13F portfolio. P2 Capital Partners is also relatively very bullish on the stock, setting aside 12.23 percent of its 13F equity portfolio to ACHC.

Judging by the fact that Acadia Healthcare Company Inc (NASDAQ:ACHC) has witnessed declining sentiment from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of hedgies who were dropping their full holdings in the first quarter. It’s worth mentioning that Paul Singer’s Elliott Management dumped the largest stake of the “upper crust” of funds tracked by Insider Monkey, worth about $144.5 million in stock. Steve Cohen’s fund, Point72 Asset Management, also sold off its stock, about $31.3 million worth. These transactions are interesting, as total hedge fund interest dropped by 4 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Acadia Healthcare Company Inc (NASDAQ:ACHC). These stocks are Aurinia Pharmaceuticals Inc (NASDAQ:AUPH), Ambarella Inc (NASDAQ:AMBA), Sabre Corporation (NASDAQ:SABR), and ABM Industries, Inc. (NYSE:ABM). This group of stocks’ market valuations resemble ACHC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AUPH 28 482900 7
AMBA 21 161557 -5
SABR 30 134131 6
ABM 18 46833 6
Average 24.25 206355 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $206 million. That figure was $273 million in ACHC’s case. Sabre Corporation (NASDAQ:SABR) is the most popular stock in this table. On the other hand ABM Industries, Inc. (NYSE:ABM) is the least popular one with only 18 bullish hedge fund positions. Acadia Healthcare Company Inc (NASDAQ:ACHC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on ACHC as the stock returned 36.9% during the second quarter and outperformed the market by an even larger margin.

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