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Hedge Funds Aren’t Done Buying West Pharmaceutical Services Inc. (WST)

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in West Pharmaceutical Services Inc. (NYSE:WST).

Is West Pharmaceutical Services Inc. (NYSE:WST) a healthy stock for your portfolio? Investors who are in the know are getting more optimistic. The number of bullish hedge fund positions inched up by 6 recently. Our calculations also showed that WST isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

TUDOR INVESTMENT CORP

Paul Tudor Jones of Tudor Investment Corp

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a peek at the recent hedge fund action regarding West Pharmaceutical Services Inc. (NYSE:WST).

What does smart money think about West Pharmaceutical Services Inc. (NYSE:WST)?

Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 25% from the second quarter of 2019. On the other hand, there were a total of 17 hedge funds with a bullish position in WST a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

WST_dec2019

More specifically, Fisher Asset Management was the largest shareholder of West Pharmaceutical Services Inc. (NYSE:WST), with a stake worth $127 million reported as of the end of September. Trailing Fisher Asset Management was Millennium Management, which amassed a stake valued at $95.4 million. Renaissance Technologies, Intermede Investment Partners, and AQR Capital Management 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 Intermede Investment Partners allocated the biggest weight to West Pharmaceutical Services Inc. (NYSE:WST), around 2.33% of its portfolio. ExodusPoint Capital is also relatively very bullish on the stock, designating 0.87 percent of its 13F equity portfolio to WST.

With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Marshall Wace, managed by Paul Marshall and Ian Wace, assembled the most outsized position in West Pharmaceutical Services Inc. (NYSE:WST). Marshall Wace had $4.1 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also initiated a $2.2 million position during the quarter. The following funds were also among the new WST investors: Paul Tudor Jones’s Tudor Investment Corp, David E. Shaw’s D E Shaw, and Matthew Hulsizer’s PEAK6 Capital Management.

Let’s also examine hedge fund activity in other stocks similar to West Pharmaceutical Services Inc. (NYSE:WST). These stocks are Globe Life Inc. (NYSE:GL), VICI Properties Inc. (NYSE:VICI), RingCentral Inc (NYSE:RNG), and Wayfair Inc (NYSE:W). All of these stocks’ market caps are similar to WST’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GL 19 828753 0
VICI 37 2262889 -22
RNG 48 1615607 3
W 30 1831086 -2
Average 33.5 1634584 -5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.5 hedge funds with bullish positions and the average amount invested in these stocks was $1635 million. That figure was $494 million in WST’s case. RingCentral Inc (NYSE:RNG) is the most popular stock in this table. On the other hand Globe Life Inc. (NYSE:GL) is the least popular one with only 19 bullish hedge fund positions. West Pharmaceutical Services Inc. (NYSE:WST) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately WST wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WST investors were disappointed as the stock returned 3.8% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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