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Did Hedge Funds Make The Right Call On Quotient Limited (QTNT) ?

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 Quotient Limited (NASDAQ:QTNT) and determine whether hedge funds had an edge regarding this stock.

Is Quotient Limited (NASDAQ:QTNT) a marvelous investment today? Investors who are in the know were taking a bearish view. The number of long hedge fund bets dropped by 2 lately. Our calculations also showed that QTNT 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). QTNT was in 20 hedge funds’ portfolios at the end of the first quarter of 2020. There were 22 hedge funds in our database with QTNT positions at the end of the previous quarter.

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.

Joseph Edelman of Perceptive Advisors

Joseph Edelman of Perceptive Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this under-the-radar lithium 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. With all of this in mind let’s go over the key hedge fund action encompassing Quotient Limited (NASDAQ:QTNT).

What does smart money think about Quotient Limited (NASDAQ:QTNT)?

Heading into the second quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards QTNT over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Perceptive Advisors, managed by Joseph Edelman, holds the largest position in Quotient Limited (NASDAQ:QTNT). Perceptive Advisors has a $52.5 million position in the stock, comprising 1.4% of its 13F portfolio. The second most bullish fund manager is Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, which holds a $30.1 million position; 0.3% of its 13F portfolio is allocated to the stock. Some other peers with similar optimism encompass Highbridge Capital Management, Bihua Chen’s Cormorant Asset Management and Farallon Capital. In terms of the portfolio weights assigned to each position Highbridge Capital Management allocated the biggest weight to Quotient Limited (NASDAQ:QTNT), around 1.76% of its 13F portfolio. Pura Vida Investments is also relatively very bullish on the stock, earmarking 1.69 percent of its 13F equity portfolio to QTNT.

Judging by the fact that Quotient Limited (NASDAQ:QTNT) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of funds that slashed their full holdings heading into Q4. At the top of the heap, Kevin Kotler’s Broadfin Capital dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, worth about $19 million in stock, and Peter S. Park’s Park West Asset Management was right behind this move, as the fund dropped about $9.8 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Quotient Limited (NASDAQ:QTNT) but similarly valued. We will take a look at Kimbell Royalty Partners, LP (NYSE:KRP), Wanda Sports Group Company Limited (NASDAQ:WSG), Noble Midstream Partners LP (NASDAQ:NBLX), and Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA). This group of stocks’ market valuations match QTNT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KRP 9 10619 3
WSG 6 5944 3
NBLX 2 1267 -3
KNSA 10 148521 1
Average 6.75 41588 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $145 million in QTNT’s case. Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) is the most popular stock in this table. On the other hand Noble Midstream Partners LP (NASDAQ:NBLX) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Quotient Limited (NASDAQ:QTNT) is more popular among hedge funds. 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on QTNT as the stock returned 102.3% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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