Did Hedge Funds Make The Right Call On Varian Medical Systems, Inc. (VAR)?

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 Varian Medical Systems, Inc. (NYSE:VAR) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Varian Medical Systems, Inc. (NYSE:VAR) a buy right now? Money managers were taking a bearish view. The number of long hedge fund positions were cut by 5 recently. Our calculations also showed that VAR 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). VAR was in 25 hedge funds’ portfolios at the end of March. There were 30 hedge funds in our database with VAR 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.

Phill Gross of Adage Capital Management

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 latest hedge fund action regarding Varian Medical Systems, Inc. (NYSE:VAR).

How have hedgies been trading Varian Medical Systems, Inc. (NYSE:VAR)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in VAR over the last 18 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Is VAR A Good Stock To Buy?

More specifically, Generation Investment Management was the largest shareholder of Varian Medical Systems, Inc. (NYSE:VAR), with a stake worth $184.5 million reported as of the end of September. Trailing Generation Investment Management was Viking Global, which amassed a stake valued at $89 million. Polar Capital, AQR Capital Management, and Citadel Investment Group 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 Generation Investment Management allocated the biggest weight to Varian Medical Systems, Inc. (NYSE:VAR), around 1.31% of its 13F portfolio. Motley Fool Asset Management is also relatively very bullish on the stock, designating 0.8 percent of its 13F equity portfolio to VAR.

Because Varian Medical Systems, Inc. (NYSE:VAR) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of hedge funds that elected to cut their positions entirely by the end of the first quarter. At the top of the heap, Anand Parekh’s Alyeska Investment Group sold off the biggest position of the 750 funds monitored by Insider Monkey, comprising about $70.3 million in stock, and James Dinan’s York Capital Management was right behind this move, as the fund cut about $61.4 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 5 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Varian Medical Systems, Inc. (NYSE:VAR). We will take a look at Suzano S.A. (NYSE:SUZ), Hologic, Inc. (NASDAQ:HOLX), Wabtec Corporation (NYSE:WAB), and Enel Americas S.A. (NYSE:ENIA). All of these stocks’ market caps match VAR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SUZ 3 27219 -1
HOLX 41 866159 0
WAB 41 1405445 0
ENIA 7 102191 -1
Average 23 600254 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $600 million. That figure was $440 million in VAR’s case. Hologic, Inc. (NASDAQ:HOLX) is the most popular stock in this table. On the other hand Suzano S.A. (NYSE:SUZ) is the least popular one with only 3 bullish hedge fund positions. Varian Medical Systems, Inc. (NYSE:VAR) 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately VAR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VAR were disappointed as the stock returned 19.3% 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.