Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.
Is Taro Pharmaceutical Industries Ltd. (NYSE:TARO) going to take off soon? Money managers are getting more optimistic. The number of bullish hedge fund bets went up by 5 in recent months. Our calculations also showed that TARO isn’t among the 30 most popular stocks among hedge funds. TARO was in 14 hedge funds’ portfolios at the end of September. There were 9 hedge funds in our database with TARO holdings at the end of the previous quarter.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 market by 18 percentage points since May 2014 through December 3, 2018 (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.
We’re going to check out the key hedge fund action surrounding Taro Pharmaceutical Industries Ltd. (NYSE:TARO).
How are hedge funds trading Taro Pharmaceutical Industries Ltd. (NYSE:TARO)?
Heading into the fourth quarter of 2018, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 56% from the previous quarter. On the other hand, there were a total of 11 hedge funds with a bullish position in TARO at the beginning of this year. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Taro Pharmaceutical Industries Ltd. (NYSE:TARO), which was worth $32.5 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $20.3 million worth of shares. Moreover, D E Shaw, Citadel Investment Group, and GLG Partners were also bullish on Taro Pharmaceutical Industries Ltd. (NYSE:TARO), allocating a large percentage of their portfolios to this stock.
Consequently, specific money managers have jumped into Taro Pharmaceutical Industries Ltd. (NYSE:TARO) headfirst. Citadel Investment Group, managed by Ken Griffin, established the most valuable position in Taro Pharmaceutical Industries Ltd. (NYSE:TARO). Citadel Investment Group had $4.4 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $0.7 million position during the quarter. The following funds were also among the new TARO investors: Paul Tudor Jones’s Tudor Investment Corp, David Costen Haley’s HBK Investments, and John Overdeck and David Siegel’s Two Sigma Advisors.
Let’s go over hedge fund activity in other stocks similar to Taro Pharmaceutical Industries Ltd. (NYSE:TARO). These stocks are Plains GP Holdings LP (NYSE:PAGP), BGC Partners, Inc. (NASDAQ:BGCP), Cabot Corporation (NYSE:CBT), and RLJ Lodging Trust (NYSE:RLJ). This group of stocks’ market caps match TARO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PAGP | 23 | 407954 | -1 |
| BGCP | 27 | 477154 | 3 |
| CBT | 24 | 201702 | -3 |
| RLJ | 20 | 330217 | 2 |
| Average | 23.5 | 354257 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $354 million. That figure was $71 million in TARO’s case. BGC Partners, Inc. (NASDAQ:BGCP) is the most popular stock in this table. On the other hand RLJ Lodging Trust (NYSE:RLJ) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is even less popular than RLJ. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.
Disclosure: None. This article was originally published at Insider Monkey.
