Were Hedge Funds Right About Loading Up On IDEXX Laboratories, Inc. (IDXX)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards IDEXX Laboratories, Inc. (NASDAQ:IDXX).

Is IDEXX Laboratories, Inc. (NASDAQ:IDXX) undervalued? Money managers were betting on the stock. The number of long hedge fund positions improved by 9 recently. IDEXX Laboratories, Inc. (NASDAQ:IDXX) was in 40 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 37. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that IDXX 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 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 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 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. 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. Keeping this in mind we’re going to go over the recent hedge fund action regarding IDEXX Laboratories, Inc. (NASDAQ:IDXX).

How are hedge funds trading IDEXX Laboratories, Inc. (NASDAQ:IDXX)?

At Q2’s end, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 29% from the previous quarter. On the other hand, there were a total of 37 hedge funds with a bullish position in IDXX 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.

More specifically, Select Equity Group was the largest shareholder of IDEXX Laboratories, Inc. (NASDAQ:IDXX), with a stake worth $96.3 million reported as of the end of June. Trailing Select Equity Group was Renaissance Technologies, which amassed a stake valued at $67.1 million. Rock Springs Capital Management, Adage Capital Management, and Echo Street 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 Brasada Capital Management allocated the biggest weight to IDEXX Laboratories, Inc. (NASDAQ:IDXX), around 1.83% of its 13F portfolio. Night Owl Capital Management is also relatively very bullish on the stock, earmarking 1.21 percent of its 13F equity portfolio to IDXX.

With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. PDT Partners, managed by Peter Muller, initiated the biggest position in IDEXX Laboratories, Inc. (NASDAQ:IDXX). PDT Partners had $8.9 million invested in the company at the end of the quarter. Ken Fisher’s Fisher Asset Management also initiated a $5.9 million position during the quarter. The following funds were also among the new IDXX investors: Louis Bacon’s Moore Global Investments, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management.

Let’s now take a look at hedge fund activity in other stocks similar to IDEXX Laboratories, Inc. (NASDAQ:IDXX). These stocks are Alcon Inc. (NYSE:ALC), CoStar Group Inc (NASDAQ:CSGP), MSCI Inc (NYSE:MSCI), Marriott International Inc (NASDAQ:MAR), ResMed Inc. (NYSE:RMD), SYSCO Corporation (NYSE:SYY), and Cintas Corporation (NASDAQ:CTAS). All of these stocks’ market caps resemble IDXX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.7 hedge funds with bullish positions and the average amount invested in these stocks was $1239 million. That figure was $417 million in IDXX’s case. CoStar Group Inc (NASDAQ:CSGP) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 21 bullish hedge fund positions. IDEXX Laboratories, Inc. (NASDAQ:IDXX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IDXX is 72.8. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on IDXX as the stock returned 28.7% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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