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Should You Buy AdaptHealth Corp. (AHCO)?

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 AdaptHealth Corp. (NASDAQ:AHCO) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in AdaptHealth Corp. (NASDAQ:AHCO) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Azul S.A. (NYSE:AZUL), Delek US Holdings, Inc. (NYSE:DK), and Xenia Hotels & Resorts Inc (NYSE:XHR) to gather more data points. Our calculations also showed that AHCO isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

BlueMountain Capital Management's Returns, AUM and Holdings

Andrew Feldstein and Stephen Siderow of Blue Mountain Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a peek at the key hedge fund action encompassing AdaptHealth Corp. (NASDAQ:AHCO).

How are hedge funds trading AdaptHealth Corp. (NASDAQ:AHCO)?

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in AHCO a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Deerfield Management held the most valuable stake in AdaptHealth Corp. (NASDAQ:AHCO), which was worth $275.2 million at the end of the third quarter. On the second spot was Blue Mountain Capital which amassed $58.4 million worth of shares. Driehaus Capital, Alyeska Investment Group, and Endurant Capital 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 Blue Mountain Capital allocated the biggest weight to AdaptHealth Corp. (NASDAQ:AHCO), around 99.58% of its 13F portfolio. Deerfield Management is also relatively very bullish on the stock, earmarking 8.73 percent of its 13F equity portfolio to AHCO.

Judging by the fact that AdaptHealth Corp. (NASDAQ:AHCO) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of funds that elected to cut their full holdings heading into Q4. At the top of the heap, Anand Parekh’s Alyeska Investment Group cut the biggest position of the 750 funds tracked by Insider Monkey, worth close to $3 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also said goodbye to its stock, about $0.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to AdaptHealth Corp. (NASDAQ:AHCO). These stocks are Azul S.A. (NYSE:AZUL), Delek US Holdings, Inc. (NYSE:DK), Xenia Hotels & Resorts Inc (NYSE:XHR), and Steelcase Inc. (NYSE:SCS). This group of stocks’ market caps resemble AHCO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AZUL 8 49217 -3
DK 16 202953 -3
XHR 8 12427 -3
SCS 23 64288 -7
Average 13.75 82221 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $350 million in AHCO’s case. Steelcase Inc. (NYSE:SCS) is the most popular stock in this table. On the other hand Azul S.A. (NYSE:AZUL) is the least popular one with only 8 bullish hedge fund positions. AdaptHealth Corp. (NASDAQ:AHCO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately AHCO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); AHCO investors were disappointed as the stock returned 0.6% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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