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Were Hedge Funds Right About STAAR Surgical Company (STAA)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards STAAR Surgical Company (NASDAQ:STAA) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is STAAR Surgical Company (NASDAQ:STAA) a superb investment right now? Investors who are in the know were selling. The number of bullish hedge fund bets decreased by 2 in recent months. Our calculations also showed that STAA 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). STAA was in 21 hedge funds’ portfolios at the end of the first quarter of 2020. There were 23 hedge funds in our database with STAA holdings at the end of the previous quarter.

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.

William Leland Edwards of Palo Alto Investors

William Leland Edwards of Palo Alto Investors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let’s take a gander at the new hedge fund action encompassing STAAR Surgical Company (NASDAQ:STAA).

What does smart money think about STAAR Surgical Company (NASDAQ:STAA)?

Heading into the second quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in STAA a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Neal C. Bradsher’s Broadwood Capital has the most valuable position in STAAR Surgical Company (NASDAQ:STAA), worth close to $348.4 million, comprising 40.7% of its total 13F portfolio. The second largest stake is held by William Leland Edwards of Palo Alto Investors, with a $105.8 million position; 8.9% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions encompass Efrem Kamen’s Pura Vida Investments, Philip Hempleman’s Ardsley Partners and Paul Marshall and Ian Wace’s Marshall Wace LLP. In terms of the portfolio weights assigned to each position Broadwood Capital allocated the biggest weight to STAAR Surgical Company (NASDAQ:STAA), around 40.72% of its 13F portfolio. Palo Alto Investors is also relatively very bullish on the stock, setting aside 8.86 percent of its 13F equity portfolio to STAA.

Since STAAR Surgical Company (NASDAQ:STAA) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of funds that elected to cut their positions entirely heading into Q4. Intriguingly, Kevin Kotler’s Broadfin Capital sold off the biggest stake of the 750 funds watched by Insider Monkey, totaling an estimated $16.3 million in stock. Mitchell Blutt’s fund, Consonance Capital Management, also sold off its stock, about $15 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 2 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to STAAR Surgical Company (NASDAQ:STAA). These stocks are Primo Water Corporation (NYSE:PRMW), Pebblebrook Hotel Trust (NYSE:PEB), Hillenbrand, Inc. (NYSE:HI), and Worthington Industries, Inc. (NYSE:WOR). This group of stocks’ market values are similar to STAA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PRMW 36 463146 23
PEB 10 224467 -12
HI 14 124446 -10
WOR 14 33700 -11
Average 18.5 211440 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $211 million. That figure was $519 million in STAA’s case. Primo Water Corporation (NYSE:PRMW) is the most popular stock in this table. On the other hand Pebblebrook Hotel Trust (NYSE:PEB) is the least popular one with only 10 bullish hedge fund positions. STAAR Surgical Company (NASDAQ:STAA) is not the most popular stock in this group but hedge fund interest is still above average. 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on STAA as the stock returned 76.3% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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