We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards PRA Health Sciences Inc (NASDAQ:PRAH).
PRA Health Sciences Inc (NASDAQ:PRAH) was in 38 hedge funds’ portfolios at the end of December. PRAH shareholders have witnessed an increase in support from the world’s most elite money managers of late. There were 35 hedge funds in our database with PRAH positions at the end of the previous quarter. Our calculations also showed that PRAH isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Larry Robbins of Glenview Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to review the recent hedge fund action regarding PRA Health Sciences Inc (NASDAQ:PRAH).
What have hedge funds been doing with PRA Health Sciences Inc (NASDAQ:PRAH)?
At Q4’s end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in PRAH a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of PRA Health Sciences Inc (NASDAQ:PRAH), with a stake worth $80.9 million reported as of the end of September. Trailing AQR Capital Management was Citadel Investment Group, which amassed a stake valued at $62.4 million. Redmile Group, Glenview Capital, and Fisher Asset 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 Kerrisdale Capital allocated the biggest weight to PRA Health Sciences Inc (NASDAQ:PRAH), around 4.4% of its 13F portfolio. Tavio Capital is also relatively very bullish on the stock, dishing out 3.2 percent of its 13F equity portfolio to PRAH.
As industrywide interest jumped, key hedge funds were breaking ground themselves. Glenview Capital, managed by Larry Robbins, initiated the largest position in PRA Health Sciences Inc (NASDAQ:PRAH). Glenview Capital had $28.1 million invested in the company at the end of the quarter. Sahm Adrangi’s Kerrisdale Capital also made a $12.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management, Michael Kharitonov and Jon David McAuliffe’s Voleon Capital, and Benjamin A. Smith’s Laurion Capital Management.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as PRA Health Sciences Inc (NASDAQ:PRAH) but similarly valued. We will take a look at The Madison Square Garden Company (NYSE:MSG), Sociedad Quimica y Minera (NYSE:SQM), Herbalife Nutrition Ltd. (NYSE:HLF), and Starwood Property Trust, Inc. (NYSE:STWD). This group of stocks’ market valuations are similar to PRAH’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MSG | 43 | 1919597 | -4 |
| SQM | 13 | 44514 | 5 |
| HLF | 32 | 3311834 | 9 |
| STWD | 21 | 168906 | 1 |
| Average | 27.25 | 1361213 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $1361 million. That figure was $363 million in PRAH’s case. The Madison Square Garden Company (NYSE:MSG) is the most popular stock in this table. On the other hand Sociedad Quimica y Minera (NYSE:SQM) is the least popular one with only 13 bullish hedge fund positions. PRA Health Sciences Inc (NASDAQ:PRAH) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately PRAH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PRAH were disappointed as the stock returned -38% during the same time period 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 many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
