Were Hedge Funds Right About Royalty Pharma Plc (RPRX)?

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 Royalty Pharma Plc (NASDAQ:RPRX).

Royalty Pharma Plc (NASDAQ:RPRX) has experienced a decrease in enthusiasm from smart money of late. Royalty Pharma Plc (NASDAQ:RPRX) was in 20 hedge funds’ portfolios at the end of June. The all time high for this statistic is 26. Our calculations also showed that RPRX isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 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 prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind we’re going to take a look at the new hedge fund action surrounding Royalty Pharma Plc (NASDAQ:RPRX).

Do Hedge Funds Think RPRX Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the first quarter of 2020. By comparison, 24 hedge funds held shares or bullish call options in RPRX a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Adage Capital Management held the most valuable stake in Royalty Pharma Plc (NASDAQ:RPRX), which was worth $931.4 million at the end of the second quarter. On the second spot was Harvard Management Co which amassed $292.8 million worth of shares. Viking Global, Renaissance Technologies, 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 Harvard Management Co allocated the biggest weight to Royalty Pharma Plc (NASDAQ:RPRX), around 16.85% of its 13F portfolio. Adage Capital Management is also relatively very bullish on the stock, dishing out 1.82 percent of its 13F equity portfolio to RPRX.

Since Royalty Pharma Plc (NASDAQ:RPRX) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few hedge funds who sold off their full holdings by the end of the second quarter. Intriguingly, Arthur B Cohen and Joseph Healey’s Healthcor Management LP cut the biggest position of all the hedgies monitored by Insider Monkey, totaling an estimated $25.8 million in stock. Simon Sadler’s fund, Segantii Capital, also sold off its stock, about $12.4 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 6 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks similar to Royalty Pharma Plc (NASDAQ:RPRX). These stocks are Credit Suisse Group AG (NYSE:CS), ONEOK, Inc. (NYSE:OKE), Yandex NV (NASDAQ:YNDX), CDW Corporation (NASDAQ:CDW), Ryanair Holdings plc (NASDAQ:RYAAY), Fresenius Medical Care AG & Co. (NYSE:FMS), and XP Inc. (NASDAQ:XP). All of these stocks’ market caps are similar to RPRX’s market cap.

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As you can see these stocks had an average of 19.9 hedge funds with bullish positions and the average amount invested in these stocks was $640 million. That figure was $1557 million in RPRX’s case. Yandex NV (NASDAQ:YNDX) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. (NYSE:FMS) is the least popular one with only 5 bullish hedge fund positions. Royalty Pharma Plc (NASDAQ:RPRX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RPRX is 50.9. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and beat the market again by 3.1 percentage points. Unfortunately RPRX wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on RPRX were disappointed as the stock returned -3.2% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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

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