Should I Avoid Hutchison China MediTech Limited (HCM)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Hutchison China MediTech Limited (NASDAQ:HCM) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Hutchison China MediTech Limited (NASDAQ:HCM) a buy here? Hedge funds were getting less optimistic. The number of long hedge fund positions decreased by 2 lately. Hutchison China MediTech Limited (NASDAQ:HCM) was in 5 hedge funds’ portfolios at the end of September. The all time high for this statistics is 23. Our calculations also showed that HCM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 7 hedge funds in our database with HCM positions at the end of the second quarter.

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 66 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.

Kerr Neilson of Platinum Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. You can subscribe to our free daily newsletter on our website. Now let’s review the new hedge fund action encompassing Hutchison China MediTech Limited (NASDAQ:HCM).

How have hedgies been trading Hutchison China MediTech Limited (NASDAQ:HCM)?

At the end of September, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HCM over the last 21 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Among these funds, Hudson Bay Capital Management held the most valuable stake in Hutchison China MediTech Limited (NASDAQ:HCM), which was worth $16.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $10.8 million worth of shares. Bridgewater Associates, Platinum Asset Management, and Millennium 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 Hudson Bay Capital Management allocated the biggest weight to Hutchison China MediTech Limited (NASDAQ:HCM), around 0.25% of its 13F portfolio. Platinum Asset Management is also relatively very bullish on the stock, setting aside 0.07 percent of its 13F equity portfolio to HCM.

Since Hutchison China MediTech Limited (NASDAQ:HCM) has faced declining sentiment from the smart money, logic holds that there were a few money managers that slashed their positions entirely heading into Q4. Interestingly, Manoj Jain and Sohit Khurana’s Maso Capital dumped the biggest position of all the hedgies tracked by Insider Monkey, comprising an estimated $1.9 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund said goodbye to about $1.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 2 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to Hutchison China MediTech Limited (NASDAQ:HCM). These stocks are DXC Technology Company (NYSE:DXC), Alaska Air Group, Inc. (NYSE:ALK), Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (NYSE:PAC), Appian Corporation (NASDAQ:APPN), Freshpet Inc (NASDAQ:FRPT), MDU Resources Group Inc (NYSE:MDU), and SmileDirectClub, Inc. (NASDAQ:SDC). All of these stocks’ market caps match HCM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DXC 37 618363 -3
ALK 34 386136 5
PAC 6 94098 -1
APPN 15 587857 -3
FRPT 23 167945 2
MDU 23 163166 2
SDC 28 157051 8
Average 23.7 310659 1.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.7 hedge funds with bullish positions and the average amount invested in these stocks was $311 million. That figure was $35 million in HCM’s case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (NYSE:PAC) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Hutchison China MediTech Limited (NASDAQ:HCM) is even less popular than PAC. Our overall hedge fund sentiment score for HCM is 9.5. 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. Hedge funds dodged a bullet by taking a bearish stance towards HCM. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th but managed to beat the market again by 16.1 percentage points. Unfortunately HCM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); HCM investors were disappointed as the stock returned -1.9% since the end of the third quarter (through 11/27) 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 most of these stocks already outperformed the market so far in 2020.

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