Were Hedge Funds Right About Piling Into DexCom, Inc. (DXCM)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtDexCom, Inc. (NASDAQ:DXCM) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is DexCom, Inc. (NASDAQ:DXCM) a buy here? The smart money was getting more bullish. The number of long hedge fund positions inched up by 18 recently. Our calculations also showed that DXCM 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). DXCM was in 58 hedge funds’ portfolios at the end of the first quarter of 2020. There were 40 hedge funds in our database with DXCM positions at the end of the previous quarter.

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.

Samuel Isaly - Orbimed Advisors

Samuel Isaly of OrbiMed Advisors

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 we’re going to take a look at the fresh hedge fund action surrounding DexCom, Inc. (NASDAQ:DXCM).

What does smart money think about DexCom, Inc. (NASDAQ:DXCM)?

Heading into the second quarter of 2020, a total of 58 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 45% from the previous quarter. On the other hand, there were a total of 33 hedge funds with a bullish position in DXCM a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in DexCom, Inc. (NASDAQ:DXCM) was held by Renaissance Technologies, which reported holding $255.6 million worth of stock at the end of September. It was followed by D E Shaw with a $163.7 million position. Other investors bullish on the company included GQG Partners, OrbiMed Advisors, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Aubrey Capital Management allocated the biggest weight to DexCom, Inc. (NASDAQ:DXCM), around 5.72% of its 13F portfolio. Soleus Capital is also relatively very bullish on the stock, setting aside 4.21 percent of its 13F equity portfolio to DXCM.

Now, some big names were leading the bulls’ herd. GQG Partners, managed by Rajiv Jain, initiated the biggest position in DexCom, Inc. (NASDAQ:DXCM). GQG Partners had $126 million invested in the company at the end of the quarter. Jeremy Green’s Redmile Group also initiated a $34.8 million position during the quarter. The following funds were also among the new DXCM investors: James E. Flynn’s Deerfield Management, Phill Gross and Robert Atchinson’s Adage Capital Management, and Brian Ashford-Russell and Tim Woolley’s Polar Capital.

Let’s also examine hedge fund activity in other stocks similar to DexCom, Inc. (NASDAQ:DXCM). We will take a look at China Telecom Corporation Limited (NYSE:CHA), Lululemon Athletica inc. (NASDAQ:LULU), MSCI Inc (NYSE:MSCI), and Manulife Financial Corporation (NYSE:MFC). This group of stocks’ market values are similar to DXCM’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHA 5 28440 -2
LULU 40 788852 -7
MSCI 29 638503 -13
MFC 20 139150 1
Average 23.5 398736 -5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $399 million. That figure was $1211 million in DXCM’s case. Lululemon Athletica inc. (NASDAQ:LULU) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks DexCom, Inc. (NASDAQ:DXCM) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on DXCM as the stock returned 50.6% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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