Five ADRs Hedge Funds Are Bullish On: Baidu, Shire, JD.Com, More

American depositary receipts -or ADRs- are U.S-traded negotiable certificates, which represent a specified number of shares (could be one or more) of a non-U.S-based company, which was established overseas. ADRs are issued by U.S banks or brokerages, which own the underlying securities abroad. While this could sound a bit elaborate, ADRs actually trade in the U.S like regular stocks, and help reduce the costs and risks of trading foreign equities.

At Insider Monkey, we track around 765 hedge funds and institutional investors. In this article, we will take a look into the most popular ADRs among these firms going into the second quarter of 2016, based on the 13Fs they filed for the first quarter of the year. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5. NetEase Inc (ADR) (NASDAQ:NTES)

Fifth on our list is NetEase Inc (ADR) (NASDAQ:NTES), in which the number of hedge funds in our database long its shares surged by 24% during the first quarter of 2016, to 31. Their combined stakes accounted for roughly 21% of the outstanding ADRs of the company and were valued at more than $2.2 billion as of March 31. Among the funds that we track, the largest position was held by Jim Simons’ Renaissance Technologies, which disclosed ownership of 2.18 million ADRs of the company, worth over $314 million as of March 31. Also quite bullish was Panayotis Takis Sparaggis’ Alkeon Capital Management, which declared holding 988,650 ADRs.

NetEase Inc (ADR) (NASDAQ:NTES), which lost 20.78% of its value over the first three months of the year, has managed to recover most of those losses in the second quarter, largely driven by a top and bottom-line beat with its first quarter results released on May 11. The company reported first quarter EPS of RMB18.56 ($2.83) on revenue of RMB7.92 billion ($1.21 billion), beating the Street’s consensus estimates by RMB3.64 and RMB70 million, respectively. One particularly strong figure in the report was the company’s year-over-year revenue growth, which hit 116.4% on the back of strong mobile game sales. Another factor that helped the stock spike in late May was the reveal of a development slate of 41 games and a deal with Microsoft Corporation (NASDAQ:MSFT) to bring that company’s Minecraft to China.

#4. Shire PLC (ADR) (NASDAQ:SHPG)

Next up is Shire PLC (ADR) (NASDAQ:SHPG), which counted the support of 49 funds among those we track as of the end of the first quarter, up by 22.5% quarter-over-quarter. Those stakes, valued at more than $2.5 billion on March 31, accounted for almost 1/3 of the company’s outstanding stock. Among the largest stockholders were John Paulson’s Paulson & Co, with 7.07 million shares worth over $1.2 billion, and Arrowstreet Capital. The latter fund, run by Peter Rathjens, Bruce Clarke and John Campbell, disclosed ownership of 526,768 ADRs of Shire PLC as of March 31.

As with many biotech stocks, Shire PLC (ADR) (NASDAQ:SHPG) suffered a rough first quarter, losing 16.15% of its value during the period. It has performed much better since April 1, having managed to rebound by 11.4%. Early Friday, the company announced that it had completed its merger with Baxalta Inc (NYSE:BXLT), creating a company with a presence in over 100 countries, more than 22,000 employees, and projected sales of more than $20 billion by 2020.

The three most popular ADRs among the funds that we track are revealed on the next page.

#3. Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)

Going into the second quarter, the third-most popular ADR among the hedge funds that we track was Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), which counted 67 supporters in our database, who held roughly 17.3% of its float. Notable positions were held by Ken Fisher’s Fisher Asset Management, which disclosed ownership of 9.32 million ADRs, and Lei Zhang’s Hillhouse Capital Management, with 8.16 million ADRs.

On Thursday, Barron’s Asia reported that investors are not overly optimistic about Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)’s acquisition of Qunar Cayman Islands Ltd (NASDAQ:QUNR), pointing out that more than 27% of the latter’s free float is currently borrowed for loans, which is usually seen as a proxy for short interest. “Qunar’s management famously dislikes Ctrip and investors question if Qunar’s integration will be smooth and whether Ctrip will just swallow up Qunar’s business,” the article explained.

#2. Baidu Inc (ADR) (NASDAQ:BIDU)

Baidu Inc (ADR) (NASDAQ:BIDU) is the runner-up in this list, with 72 hedge fund backers among those we track as of March 31, up by 30.9% quarter-over-quarter, with them holding 9.3% of its float. Harris Associates, a subsidiary of Natixis Global Asset Management, initiated a stake in the company comprising roughly 4.69 million ADRs worth $895 million as of March 31.

Baidu Inc (ADR) (NASDAQ:BIDU) experienced plenty of volatility over the March quarter, but the stock ended up relatively flat, being up by 0.97%. Performance in the second quarter was quite choppy as well, with the stock down by more than 9% to date. The decline was largely driven by an investigation launched by Chinese regulators following the death of a student there, who passed away after allegedly undergoing an experimental cancer treatment through a paid advertisement on Baidu’s search engine, which ultimately did not manage to cure his rare form of cancer.

#1. JD.Com Inc(ADR) (NASDAQ:JD)

Finally, there’s JD.Com Inc(ADR) (NASDAQ:JD), the most popular ADR among the funds in our database, counting 73 supporters, which held almost 40% of the company’s float as of March 31. Lei Zhang’s Hillhouse Capital Management was by far the largest institutional shareholder of record, with 123.2 million ADRs valued at $3.26 billion as of March 31. Another large stake was held by Tiger Global Management, which disclosed ownership of 44 million ADRs of the Chinese company.

The ADRs of JD.Com Inc(ADR) (NASDAQ:JD), which fell by 17.87% over the first quarter, continued to tumble in the second quarter, losing another 13.2%. Most recently, the stock has been suffering on the back of an SEC probe which its rival, Alibaba Group Holding Ltd (NYSE:BABA), was subjected to. The probe into Alibaba’s accounting practices may have caused some small seeds of doubt to grow in the minds of investors when it comes to Chinese stocks in general.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned in this article.