Was The Smart Money Right About Tabula Rasa HealthCare, Inc. (TRHC)?

Hedge funds don’t get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don’t realize is that 100% of the passive funds didn’t see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In this article we are going to take a closer look at the hedge fund sentiment surrounding Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC).

Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) was in 6 hedge funds’ portfolios at the end of December. TRHC investors should pay attention to a decrease in enthusiasm from smart money recently. There were 11 hedge funds in our database with TRHC positions at the end of the previous quarter. Our calculations also showed that TRHC 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).

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 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 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.

Steven Cohen of Point72 Asset Management

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with high accuracy, so we check out his stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind we’re going to view the new hedge fund action encompassing Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC).

How are hedge funds trading Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC)?

Heading into the first quarter of 2020, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -45% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TRHC over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is TRHC A Good Stock To Buy?

More specifically, Sectoral Asset Management was the largest shareholder of Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC), with a stake worth $10.1 million reported as of the end of September. Trailing Sectoral Asset Management was Royce & Associates, which amassed a stake valued at $10 million. Point72 Asset Management, Millennium Management, and Citadel Investment Group 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 Sectoral Asset Management allocated the biggest weight to Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC), around 1.5% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, earmarking 0.09 percent of its 13F equity portfolio to TRHC.

Because Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) has faced a decline in interest from hedge fund managers, we can see that there was a specific group of money managers who sold off their entire stakes last quarter. It’s worth mentioning that Mark Coe’s Intrinsic Edge Capital sold off the biggest investment of the “upper crust” of funds monitored by Insider Monkey, comprising about $10.3 million in stock. John Osterweis’s fund, Osterweis Capital Management, also cut its stock, about $5.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 5 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) but similarly valued. We will take a look at Omega Flex, Inc. (NASDAQ:OFLX), Primoris Services Corp (NASDAQ:PRIM), Arch Coal, Inc. (NYSE:ARCH), and Warrior Met Coal (NYSE:HCC). This group of stocks’ market values are similar to TRHC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OFLX 6 5185 1
PRIM 11 32912 -3
ARCH 26 197756 -1
HCC 29 254959 0
Average 18 122703 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $123 million. That figure was $26 million in TRHC’s case. HCC is the most popular stock in this table. On the other hand Omega Flex, Inc. (NASDAQ:OFLX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) is even less popular than OFLX. Hedge funds clearly dropped the ball on TRHC as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 1.0% in 2020 through May 1st but still beat the market by 12.9 percentage points. A small number of hedge funds were also right about betting on TRHC as the stock returned 23.3% during the same time period and outperformed the market by an even larger margin.
5 Most Popular Stocks Among Hedge Funds
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.