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Should I Buy Varian Medical Systems, Inc. (VAR)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Varian Medical Systems, Inc. (NYSE:VAR) and determine whether hedge funds skillfully traded this stock.

Varian Medical Systems, Inc. (NYSE:VAR) has seen an increase in hedge fund interest lately. Varian Medical Systems, Inc. (NYSE:VAR) was in 27 hedge funds’ portfolios at the end of June. The all time high for this statistics is 32. Our calculations also showed that VAR 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.

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Blood

David Blood of Generation Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a look at the new hedge fund action surrounding Varian Medical Systems, Inc. (NYSE:VAR).

Hedge fund activity in Varian Medical Systems, Inc. (NYSE:VAR)

At Q2’s end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in VAR over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Generation Investment Management was the largest shareholder of Varian Medical Systems, Inc. (NYSE:VAR), with a stake worth $400.3 million reported as of the end of September. Trailing Generation Investment Management was Viking Global, which amassed a stake valued at $44.8 million. AQR Capital Management, Alyeska Investment Group, and Fairpointe Capital 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 Generation Investment Management allocated the biggest weight to Varian Medical Systems, Inc. (NYSE:VAR), around 2.31% of its 13F portfolio. Fairpointe Capital is also relatively very bullish on the stock, designating 2.02 percent of its 13F equity portfolio to VAR.

As industrywide interest jumped, key money managers have jumped into Varian Medical Systems, Inc. (NYSE:VAR) headfirst. Alyeska Investment Group, managed by Anand Parekh, created the biggest position in Varian Medical Systems, Inc. (NYSE:VAR). Alyeska Investment Group had $31.2 million invested in the company at the end of the quarter. Thyra Zerhusen’s Fairpointe Capital also initiated a $13.8 million position during the quarter. The other funds with brand new VAR positions are Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management, David Harding’s Winton Capital Management, and Minhua Zhang’s Weld Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Varian Medical Systems, Inc. (NYSE:VAR) but similarly valued. These stocks are Ubiquiti Inc. (NYSE:UI), SVB Financial Group (NASDAQ:SIVB), Jacobs Engineering Group Inc. (NYSE:J), UDR, Inc. (NYSE:UDR), Lumen Technologies, Inc. (NYSE:CTL), E*TRADE Financial Corporation (NASDAQ:ETFC), and Wabtec Corporation (NYSE:WAB). All of these stocks’ market caps are similar to VAR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UI 29 227931 6
SIVB 26 456322 -4
J 32 1047013 4
UDR 29 389036 10
CTL 30 788387 -4
ETFC 36 1370357 -1
WAB 39 1528246 -2
Average 31.6 829613 1.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.6 hedge funds with bullish positions and the average amount invested in these stocks was $830 million. That figure was $586 million in VAR’s case. Wabtec Corporation (NYSE:WAB) is the most popular stock in this table. On the other hand SVB Financial Group (NASDAQ:SIVB) is the least popular one with only 26 bullish hedge fund positions. Varian Medical Systems, Inc. (NYSE:VAR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for VAR is 36.2. 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 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 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. A small number of hedge funds were also right about betting on VAR as the stock returned 40.4% since the end of June (through September 25th) and outperformed the market by an even larger margin.

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