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 Humana Inc (NYSE:HUM) and determine whether hedge funds had an edge regarding this stock.
Humana Inc (NYSE:HUM) has experienced an increase in support from the world’s most elite money managers lately. Our calculations also showed that HUM isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s analyze the fresh hedge fund action surrounding Humana Inc (NYSE:HUM).
Hedge fund activity in Humana Inc (NYSE:HUM)
At the end of June, a total of 73 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HUM over the last 20 quarters. So, let’s check out 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, Lone Pine Capital, founded by Stephen Mandel, holds the most valuable position in Humana Inc (NYSE:HUM). Lone Pine Capital has a $939.9 million position in the stock, comprising 4.7% of its 13F portfolio. On Lone Pine Capital’s heels is Renaissance Technologies, founded by Jim Simons, holding a $902.4 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Other peers that hold long positions comprise Cliff Asness’s AQR Capital Management, Lee Ainslie’s Maverick Capital and Ric Dillon’s Diamond Hill Capital. In terms of the portfolio weights assigned to each position BloombergSen allocated the biggest weight to Humana Inc (NYSE:HUM), around 8.19% of its 13F portfolio. Maverick Capital is also relatively very bullish on the stock, earmarking 6.33 percent of its 13F equity portfolio to HUM.
With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Senator Investment Group, managed by Doug Silverman and Alexander Klabin, established the largest position in Humana Inc (NYSE:HUM). Senator Investment Group had $135.7 million invested in the company at the end of the quarter. Aaron Cowen’s Suvretta Capital Management also made a $61.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management, Michael Rockefeller and KarláKroeker’s Woodline Partners, and Dmitry Balyasny’s Balyasny Asset Management.
Let’s go over hedge fund activity in other stocks similar to Humana Inc (NYSE:HUM). We will take a look at Northrop Grumman Corporation (NYSE:NOC), Global Payments Inc (NYSE:GPN), Sea Limited (NYSE:SE), Truist Financial Corporation (NYSE:TFC), CNOOC Limited (NYSE:CEO), Boston Scientific Corporation (NYSE:BSX), and Intercontinental Exchange Inc (NYSE:ICE). All of these stocks’ market caps resemble HUM’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 52.4 hedge funds with bullish positions and the average amount invested in these stocks was $2312 million. That figure was $4698 million in HUM’s case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand CNOOC Limited (NYSE:CEO) is the least popular one with only 13 bullish hedge fund positions. Humana Inc (NYSE:HUM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for HUM is 80.7. 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. 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 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 28.2% in 2020 through August 24th but beat the market by 20.6 percentage points. Unfortunately HUM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HUM were disappointed as the stock returned 4.7% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.