Did Hedge Funds Make The Right Call On Intercept Pharmaceuticals Inc (ICPT)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Intercept Pharmaceuticals Inc (NASDAQ:ICPT) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Intercept Pharmaceuticals Inc (NASDAQ:ICPT) an excellent investment now? Hedge funds were taking a pessimistic view. The number of bullish hedge fund positions decreased by 8 lately. Our calculations also showed that ICPT 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). ICPT was in 19 hedge funds’ portfolios at the end of March. There were 27 hedge funds in our database with ICPT holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Alex Denner Sarissa Capital

Alex Denner of Sarissa Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s analyze the latest hedge fund action regarding Intercept Pharmaceuticals Inc (NASDAQ:ICPT).

How have hedgies been trading Intercept Pharmaceuticals Inc (NASDAQ:ICPT)?

At Q1’s end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -30% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ICPT over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Intercept Pharmaceuticals Inc (NASDAQ:ICPT) was held by Sarissa Capital Management, which reported holding $72.7 million worth of stock at the end of September. It was followed by Rima Senvest Management with a $67.9 million position. Other investors bullish on the company included Two Sigma Advisors, Samsara BioCapital, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Samsara BioCapital allocated the biggest weight to Intercept Pharmaceuticals Inc (NASDAQ:ICPT), around 14.63% of its 13F portfolio. Sarissa Capital Management is also relatively very bullish on the stock, setting aside 9.28 percent of its 13F equity portfolio to ICPT.

Seeing as Intercept Pharmaceuticals Inc (NASDAQ:ICPT) has faced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there exists a select few hedgies who were dropping their entire stakes heading into Q4. At the top of the heap, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners sold off the biggest stake of the 750 funds tracked by Insider Monkey, comprising about $18.6 million in stock. Joseph Edelman’s fund, Perceptive Advisors, also sold off its stock, about $12.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 8 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Intercept Pharmaceuticals Inc (NASDAQ:ICPT). These stocks are Brookfield Business Partners L.P. (NYSE:BBU), Integer Holdings Corporation (NYSE:ITGR), Apple Hospitality REIT Inc (NYSE:APLE), and Proto Labs Inc (NYSE:PRLB). This group of stocks’ market values are closest to ICPT’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BBU 2 1459 -2
ITGR 20 88925 0
APLE 11 74704 -4
PRLB 13 21459 3
Average 11.5 46637 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $47 million. That figure was $259 million in ICPT’s case. Integer Holdings Corporation (NYSE:ITGR) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 2 bullish hedge fund positions. Intercept Pharmaceuticals Inc (NASDAQ:ICPT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately ICPT wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ICPT were disappointed as the stock returned -26.3% during the same time period 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 many of these stocks already outperformed the market so far this year.

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