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 Baxter International Inc. (NYSE:BAX) and determine whether hedge funds had an edge regarding this stock.
Is Baxter International Inc. (NYSE:BAX) a buy, sell, or hold? The best stock pickers were becoming more confident. The number of bullish hedge fund positions moved up by 3 in recent months. Our calculations also showed that BAX 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.
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 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. 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold prices. So, we are checking out this junior gold mining stock. 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. Now let’s take a peek at the latest hedge fund action surrounding Baxter International Inc. (NYSE:BAX).
What does smart money think about Baxter International Inc. (NYSE:BAX)?
At the end of the first quarter, a total of 50 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in BAX 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.
More specifically, Third Point was the largest shareholder of Baxter International Inc. (NYSE:BAX), with a stake worth $940.2 million reported as of the end of September. Trailing Third Point was Generation Investment Management, which amassed a stake valued at $824.9 million. Citadel Investment Group, AQR Capital 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 Third Point allocated the biggest weight to Baxter International Inc. (NYSE:BAX), around 15% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, earmarking 5.86 percent of its 13F equity portfolio to BAX.
As industrywide interest jumped, key hedge funds were leading the bulls’ herd. Glenview Capital, managed by Larry Robbins, assembled the largest position in Baxter International Inc. (NYSE:BAX). Glenview Capital had $39.2 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $38.7 million investment in the stock during the quarter. The following funds were also among the new BAX investors: James Dinan’s York Capital Management, Christopher James’s Partner Fund Management, and Kevin Molloy’s Iron Triangle Partners.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Baxter International Inc. (NYSE:BAX) but similarly valued. We will take a look at PNC Financial Services Group Inc. (NYSE:PNC), NetEase, Inc (NASDAQ:NTES), National Grid plc (NYSE:NGG), and Zoom Video Communications, Inc. (NASDAQ:ZM). This group of stocks’ market caps are closest to BAX’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1842 million. That figure was $3209 million in BAX’s case. Zoom Video Communications, Inc. (NASDAQ:ZM) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Baxter International Inc. (NYSE:BAX) is more popular among hedge funds. 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 still beat the market by 15.5 percentage points. Unfortunately BAX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on BAX were disappointed as the stock returned 6.3% 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.
Disclosure: None. This article was originally published at Insider Monkey.