Were Hedge Funds Right About Zai Lab Limited (ZLAB)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the third quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 6 years and analyze what the smart money thinks of Zai Lab Limited (NASDAQ:ZLAB) based on that data and determine whether they were really smart about the stock.

Zai Lab Limited (NASDAQ:ZLAB) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 36 hedge funds’ portfolios at the end of September. Our calculations also showed that ZLAB isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as FirstService Corporation (NASDAQ:FSV), WEX Inc (NYSE:WEX), and Gentex Corporation (NASDAQ:GNTX) to gather more data points.

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 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. Now let’s take a glance at the fresh hedge fund action regarding Zai Lab Limited (NASDAQ:ZLAB).

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

At the end of the third quarter, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2021. By comparison, 28 hedge funds held shares or bullish call options in ZLAB a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

The largest stake in Zai Lab Limited (NASDAQ:ZLAB) was held by Viking Global, which reported holding $309.1 million worth of stock at the end of September. It was followed by Rock Springs Capital Management with a $113.6 million position. Other investors bullish on the company included Segantii Capital, Hudson Bay Capital Management, and Atika Capital. In terms of the portfolio weights assigned to each position Indus Capital allocated the biggest weight to Zai Lab Limited (NASDAQ:ZLAB), around 3.78% of its 13F portfolio. Segantii Capital is also relatively very bullish on the stock, earmarking 2.41 percent of its 13F equity portfolio to ZLAB.

Judging by the fact that Zai Lab Limited (NASDAQ:ZLAB) has experienced a decline in interest from the entirety of the hedge funds we track, logic holds that there is a sect of fund managers who were dropping their positions entirely in the third quarter. At the top of the heap, Richard Driehaus’s Driehaus Capital dropped the largest investment of the 750 funds watched by Insider Monkey, comprising about $44.3 million in stock, and Ting Jia’s Octagon Capital Advisors was right behind this move, as the fund said goodbye to about $19.4 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Zai Lab Limited (NASDAQ:ZLAB) but similarly valued. We will take a look at FirstService Corporation (NASDAQ:FSV), WEX Inc (NYSE:WEX), Gentex Corporation (NASDAQ:GNTX), AptarGroup, Inc. (NYSE:ATR), Cosan S.A. (NYSE:CSAN), Rexnord Corp (NYSE:RXN), and TuSimple Holdings Inc. (NASDAQ:TSP). This group of stocks’ market caps resemble ZLAB’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.1 hedge funds with bullish positions and the average amount invested in these stocks was $499 million. That figure was $861 million in ZLAB’s case. Rexnord Corp (NYSE:RXN) is the most popular stock in this table. On the other hand Cosan S.A. (NYSE:CSAN) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Zai Lab Limited (NASDAQ:ZLAB) is more popular among hedge funds. Our overall hedge fund sentiment score for ZLAB is 85. 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. 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 and still beat the market by 3.6 percentage points. Unfortunately, ZLAB wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on ZLAB were disappointed as the stock returned -52.9% since the end of the third quarter (through 1/31) 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 all of these stocks already outperformed the market since 2019.

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