Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 900 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Option Care Health, Inc. (NASDAQ:OPCH).
Is Option Care Health, Inc. (NASDAQ:OPCH) undervalued? Investors who are in the know were in a bullish mood. The number of bullish hedge fund positions inched up by 7 recently. Option Care Health, Inc. (NASDAQ:OPCH) was in 31 hedge funds’ portfolios at the end of March. The all time high for this statistic was previously 24. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that OPCH isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 24 hedge funds in our database with OPCH positions at the end of the fourth 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 S&P 500 ETFs by 115 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.
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Do Hedge Funds Think OPCH Is A Good Stock To Buy Now?
At the end of the first quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 29% from the previous quarter. The graph below displays the number of hedge funds with bullish position in OPCH over the last 23 quarters. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Park West Asset Management was the largest shareholder of Option Care Health, Inc. (NASDAQ:OPCH), with a stake worth $113 million reported as of the end of March. Trailing Park West Asset Management was Marshall Wace LLP, which amassed a stake valued at $40.3 million. Polar Capital, Millennium Management, and Luminus 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 Luminus Management allocated the biggest weight to Option Care Health, Inc. (NASDAQ:OPCH), around 5.24% of its 13F portfolio. Park West Asset Management is also relatively very bullish on the stock, dishing out 3.42 percent of its 13F equity portfolio to OPCH.
With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Luminus Management, managed by Jonathan Barrett and Paul Segal, created the largest position in Option Care Health, Inc. (NASDAQ:OPCH). Luminus Management had $27.3 million invested in the company at the end of the quarter. John Brennan’s Sirios Capital Management also made a $11.1 million investment in the stock during the quarter. The other funds with brand new OPCH positions are Michael Rockefeller and KarláKroeker’s Woodline Partners, Anand Parekh’s Alyeska Investment Group, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Option Care Health, Inc. (NASDAQ:OPCH) but similarly valued. These stocks are Walker & Dunlop Inc. (NYSE:WD), FibroGen Inc (NASDAQ:FGEN), Bandwidth Inc. (NASDAQ:BAND), Outfront Media Inc. (REIT) (NYSE:OUT), Wolverine World Wide, Inc. (NYSE:WWW), Trinity Industries, Inc. (NYSE:TRN), and Empire State Realty OP, L.P. (NYSE:ESBA). This group of stocks’ market valuations are closest to OPCH’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $354 million. That figure was $374 million in OPCH’s case. Outfront Media Inc. (REIT) (NYSE:OUT) is the most popular stock in this table. On the other hand Empire State Realty OP, L.P. (NYSE:ESBA) is the least popular one with only 1 bullish hedge fund positions. Option Care Health, Inc. (NASDAQ:OPCH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for OPCH is 77.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.8% in 2021 through July 2nd and still beat the market by 6 percentage points. Hedge funds were also right about betting on OPCH as the stock returned 23.4% since the end of Q1 (through 7/2) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.