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Hedge Funds Are Selling Taro Pharmaceutical Industries Ltd. (TARO)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing 821 13F filings submitted by hedge funds and prominent investors. These filings show these funds’ portfolio positions as of March 31st, 2020. What do these smart investors think about Taro Pharmaceutical Industries Ltd. (NYSE:TARO)?

Is Taro Pharmaceutical Industries Ltd. (NYSE:TARO) a marvelous investment right now? The best stock pickers are turning less bullish. The number of bullish hedge fund positions were cut by 3 in recent months. Our calculations also showed that TARO 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). TARO was in 9 hedge funds’ portfolios at the end of March. There were 12 hedge funds in our database with TARO positions at the end of the previous quarter.

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

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 S&P 500 ETFs by 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.

Kamran Moghtaderi of Eversept Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind let’s analyze the fresh hedge fund action encompassing Taro Pharmaceutical Industries Ltd. (NYSE:TARO).

How are hedge funds trading Taro Pharmaceutical Industries Ltd. (NYSE:TARO)?

Heading into the second quarter of 2020, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the fourth quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in TARO a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

The largest stake in Taro Pharmaceutical Industries Ltd. (NYSE:TARO) was held by Renaissance Technologies, which reported holding $40.8 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $11.8 million position. Other investors bullish on the company included D E Shaw, Eversept Partners, and Marshall Wace LLP. In terms of the portfolio weights assigned to each position Eversept Partners allocated the biggest weight to Taro Pharmaceutical Industries Ltd. (NYSE:TARO), around 1.18% of its 13F portfolio. Caxton Associates LP is also relatively very bullish on the stock, earmarking 0.1 percent of its 13F equity portfolio to TARO.

Seeing as Taro Pharmaceutical Industries Ltd. (NYSE:TARO) has experienced a decline in interest from hedge fund managers, it’s safe to say that there was a specific group of money managers that slashed their positions entirely last quarter. Intriguingly, Israel Englander’s Millennium Management cut the biggest investment of all the hedgies tracked by Insider Monkey, totaling an estimated $4.4 million in stock. Peter Algert and Kevin Coldiron’s fund, Algert Coldiron Investors, also dumped its stock, about $2.5 million worth. These transactions are important to note, as total hedge fund interest dropped by 3 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Taro Pharmaceutical Industries Ltd. (NYSE:TARO) but similarly valued. These stocks are Natera Inc (NASDAQ:NTRA), Wingstop Inc (NASDAQ:WING), Shell Midstream Partners LP (NYSE:SHLX), and Thor Industries, Inc. (NYSE:THO). This group of stocks’ market valuations are closest to TARO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NTRA 32 392988 -1
WING 27 264265 3
SHLX 4 12962 -4
THO 20 80400 -10
Average 20.75 187654 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $188 million. That figure was $65 million in TARO’s case. Natera Inc (NASDAQ:NTRA) is the most popular stock in this table. On the other hand Shell Midstream Partners LP (NYSE:SHLX) is the least popular one with only 4 bullish hedge fund positions. Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 13.4% in 2020 through June 22nd and surpassed the market by 15.9 percentage points. Unfortunately TARO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); TARO investors were disappointed as the stock returned 10.3% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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