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Were Hedge Funds Right About Piling Into Baxter International Inc. (BAX)?

Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Baxter International Inc. (NYSE:BAX).

Baxter International Inc. (NYSE:BAX) investors should be aware of an increase in support from the world’s most elite money managers lately. BAX was in 34 hedge funds’ portfolios at the end of June. There were 30 hedge funds in our database with BAX positions at the end of the previous quarter. Our calculations also showed that BAX isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Dan Loeb THIRD POINT

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to view the new hedge fund action encompassing Baxter International Inc. (NYSE:BAX).

What have hedge funds been doing with Baxter International Inc. (NYSE:BAX)?

Heading into the third quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards BAX over the last 16 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with BAX Positions

Among these funds, Third Point held the most valuable stake in Baxter International Inc. (NYSE:BAX), which was worth $1883.7 million at the end of the second quarter. On the second spot was AQR Capital Management which amassed $295.6 million worth of shares. Moreover, Two Sigma Advisors, Balyasny Asset Management, and Citadel Investment Group were also bullish on Baxter International Inc. (NYSE:BAX), allocating a large percentage of their portfolios to this stock.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, established the most valuable position in Baxter International Inc. (NYSE:BAX). Citadel Investment Group had $77.7 million invested in the company at the end of the quarter. Charles Clough’s Clough Capital Partners also initiated a $9.8 million position during the quarter. The following funds were also among the new BAX investors: Steve Cohen’s Point72 Asset Management, Brandon Haley’s Holocene Advisors, and Nick Thakore’s Diametric Capital.

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. These stocks are FedEx Corporation (NYSE:FDX), BCE Inc. (NYSE:BCE), Orange S.A. (NYSE:ORAN), and L3Harris Technologies, Inc. (NYSE:LHX). This group of stocks’ market values are similar to BAX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FDX 40 1808917 -1
BCE 14 364792 -2
ORAN 2 1488 0
LHX 30 770043 5
Average 21.5 736310 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $736 million. That figure was $2818 million in BAX’s case. FedEx Corporation (NYSE:FDX) is the most popular stock in this table. On the other hand Orange S.A. (NYSE:ORAN) is the least popular one with only 2 bullish hedge fund positions. Baxter International Inc. (NYSE:BAX) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on BAX as the stock returned 7.1% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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