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Hedge Funds Are Selling Dr. Reddy’s Laboratories Limited (RDY)

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 Dr. Reddy’s Laboratories Limited (NYSE:RDY) and determine whether hedge funds had an edge regarding this stock.

Is Dr. Reddy’s Laboratories Limited (NYSE:RDY) a buy right now? Hedge funds were taking a pessimistic view. The number of bullish hedge fund bets shrunk by 1 recently. Our calculations also showed that RDY 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).

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

At the moment there are tons of methods stock market investors put to use to grade publicly traded companies. A pair of the less known methods are hedge fund and insider trading sentiment. Our researchers have shown that, historically, those who follow the top picks of the elite investment managers can outpace the broader indices by a solid amount (see the details here).

Gifford Combs - Dalton Investments

Gifford Combs of Dalton Investments

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the fresh hedge fund action surrounding Dr. Reddy’s Laboratories Limited (NYSE:RDY).

How have hedgies been trading Dr. Reddy’s Laboratories Limited (NYSE:RDY)?

At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in RDY 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.

When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the biggest position in Dr. Reddy’s Laboratories Limited (NYSE:RDY), worth close to $80.5 million, accounting for 0.1% of its total 13F portfolio. Coming in second is Cliff Asness of AQR Capital Management, with a $11.2 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining professional money managers that are bullish contain D. E. Shaw’s D E Shaw, Noam Gottesman’s GLG Partners and Gifford Combs’s Dalton Investments. In terms of the portfolio weights assigned to each position Dalton Investments allocated the biggest weight to Dr. Reddy’s Laboratories Limited (NYSE:RDY), around 2.36% of its 13F portfolio. Portland Hill Asset Management is also relatively very bullish on the stock, dishing out 1.29 percent of its 13F equity portfolio to RDY.

Because Dr. Reddy’s Laboratories Limited (NYSE:RDY) has faced a decline in interest from hedge fund managers, logic holds that there exists a select few money managers who sold off their positions entirely in the first quarter. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace LLP cut the biggest stake of all the hedgies watched by Insider Monkey, totaling an estimated $5.8 million in stock, and Sander Gerber’s Hudson Bay Capital Management was right behind this move, as the fund said goodbye to about $0.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds in the first quarter.

Let’s go over hedge fund activity in other stocks similar to Dr. Reddy’s Laboratories Limited (NYSE:RDY). We will take a look at Darden Restaurants, Inc. (NYSE:DRI), RenaissanceRe Holdings Ltd. (NYSE:RNR), Ionis Pharmaceuticals, Inc. (NASDAQ:IONS), and Guardant Health, Inc. (NASDAQ:GH). All of these stocks’ market caps are similar to RDY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DRI 52 879489 19
RNR 30 675791 7
IONS 22 342085 -5
GH 27 549369 -2
Average 32.75 611684 4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.75 hedge funds with bullish positions and the average amount invested in these stocks was $612 million. That figure was $113 million in RDY’s case. Darden Restaurants, Inc. (NYSE:DRI) is the most popular stock in this table. On the other hand Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Dr. Reddy’s Laboratories Limited (NYSE:RDY) is even less popular than IONS. Hedge funds clearly dropped the ball on RDY as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on RDY as the stock returned 31.4% in the second quarter and outperformed the market by an even larger margin.

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