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Did Hedge Funds Make The Right Call On Guardant Health, Inc. (GH)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Guardant Health, Inc. (NASDAQ:GH) based on that data and determine whether they were really smart about the stock.

Guardant Health, Inc. (NASDAQ:GH) has seen a decrease in support from the world’s most elite money managers recently. Our calculations also showed that GH 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.

Kris Jenner - Rock Springs Capital

Kris Jenner of Rock Springs Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the new hedge fund action surrounding Guardant Health, Inc. (NASDAQ:GH).

Hedge fund activity in Guardant Health, Inc. (NASDAQ:GH)

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in GH 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 adding to their holdings considerably (or already accumulated large positions).

Among these funds, Viking Global held the most valuable stake in Guardant Health, Inc. (NASDAQ:GH), which was worth $264.4 million at the end of the third quarter. On the second spot was Coatue Management which amassed $159.5 million worth of shares. Marshall Wace LLP, Rock Springs Capital Management, and Rhenman & Partners Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Coatue Management allocated the biggest weight to Guardant Health, Inc. (NASDAQ:GH), around 2.02% of its 13F portfolio. Islet Management is also relatively very bullish on the stock, earmarking 1.73 percent of its 13F equity portfolio to GH.

Seeing as Guardant Health, Inc. (NASDAQ:GH) has experienced falling interest from the smart money, logic holds that there is a sect of hedge funds that decided to sell off their positions entirely by the end of the first quarter. At the top of the heap, Jeremy Green’s Redmile Group said goodbye to the largest stake of the “upper crust” of funds watched by Insider Monkey, comprising close to $30.5 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dropped about $26.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 2 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Guardant Health, Inc. (NASDAQ:GH) but similarly valued. We will take a look at Guidewire Software Inc (NYSE:GWRE), ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), Perrigo Company plc (NYSE:PRGO), and ABIOMED, Inc. (NASDAQ:ABMD). This group of stocks’ market valuations are similar to GH’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GWRE 34 756960 2
ACAD 28 2404189 -6
PRGO 28 463596 1
ABMD 27 522802 -8
Average 29.25 1036887 -2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $1037 million. That figure was $549 million in GH’s case. Guidewire Software Inc (NYSE:GWRE) is the most popular stock in this table. On the other hand ABIOMED, Inc. (NASDAQ:ABMD) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Guardant Health, Inc. (NASDAQ:GH) is even less popular than ABMD. Hedge funds dodged a bullet by taking a bearish stance towards GH. Our calculations showed that the top 10 most popular hedge fund stocks 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 but managed to beat the market by 15.5 percentage points. Unfortunately GH wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); GH investors were disappointed as the stock returned 16.6% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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