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Were Hedge Funds Right About Warming Up To Teladoc Health Inc (TDOC)?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Teladoc Health Inc (NYSE:TDOC).

Is Teladoc Health Inc (NYSE:TDOC) undervalued? Investors who are in the know are getting more optimistic. The number of bullish hedge fund positions improved by 1 in recent months. Our calculations also showed that TDOC 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’ 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 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 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.

Dmitry Balyasny

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 take a peek at the recent hedge fund action regarding Teladoc Health Inc (NYSE:TDOC).

What have hedge funds been doing with Teladoc Health Inc (NYSE:TDOC)?

Heading into the third quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards TDOC over the last 16 quarters. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

TDOC_oct2019

Of the funds tracked by Insider Monkey, Sectoral Asset Management, managed by Jerome Pfund and Michael Sjostrom, holds the largest position in Teladoc Health Inc (NYSE:TDOC). Sectoral Asset Management has a $34.1 million position in the stock, comprising 4.1% of its 13F portfolio. Coming in second is Jeremy Green of Redmile Group, with a $30.7 million position; 0.9% of its 13F portfolio is allocated to the company. Some other members of the smart money with similar optimism comprise Joseph Edelman’s Perceptive Advisors, Brian Ashford-Russell and Tim Woolley’s Polar Capital and Ken Griffin’s Citadel Investment Group.

Consequently, key hedge funds have jumped into Teladoc Health Inc (NYSE:TDOC) headfirst. Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, created the biggest position in Teladoc Health Inc (NYSE:TDOC). Polar Capital had $19.1 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital also made a $10.3 million investment in the stock during the quarter. The following funds were also among the new TDOC investors: Krishen Sud’s Sivik Global Healthcare, Dmitry Balyasny’s Balyasny Asset Management, and Allan Teh’s Kamunting Street Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Teladoc Health Inc (NYSE:TDOC) but similarly valued. These stocks are VEON Ltd. (NASDAQ:VEON), Hawaiian Electric Industries, Inc. (NYSE:HE), Blackstone Mortgage Trust Inc (NYSE:BXMT), and Huntsman Corporation (NYSE:HUN). All of these stocks’ market caps resemble TDOC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VEON 12 72439 -3
HE 17 146762 5
BXMT 20 143928 5
HUN 30 413733 -5
Average 19.75 194216 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $194 million. That figure was $172 million in TDOC’s case. Huntsman Corporation (NYSE:HUN) is the most popular stock in this table. On the other hand VEON Ltd. (NASDAQ:VEON) is the least popular one with only 12 bullish hedge fund positions. Teladoc Health Inc (NYSE:TDOC) is not the least popular stock in this group but hedge fund interest is still below 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. A small number of hedge funds were also right about betting on TDOC, though not to the same extent, as the stock returned 2% during the third quarter and outperformed the market.

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

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