Were These Hedge Funds Right About Herbalife Nutrition Ltd. (HLF)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Herbalife Nutrition Ltd. (NYSE:HLF).

Herbalife Nutrition Ltd. (NYSE:HLF) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. HLF investors should pay attention to an increase in hedge fund interest lately. There were 31 hedge funds in our database with HLF positions at the end of the first quarter. Our calculations also showed that HLF isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

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 56 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.

Carl Icahn - Icahn Capital Lp

Carl Icahn of Icahn Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to review the key hedge fund action surrounding Herbalife Nutrition Ltd. (NYSE:HLF).

How are hedge funds trading Herbalife Nutrition Ltd. (NYSE:HLF)?

At the end of June, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 16% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in HLF over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Herbalife Nutrition Ltd. (NYSE:HLF) was held by Icahn Capital LP, which reported holding $1584.6 million worth of stock at the end of June. It was followed by Renaissance Technologies with a $494.7 million position. Other investors bullish on the company included Deccan Value Advisors, Route One Investment Company, and Bronte Capital. In terms of the portfolio weights assigned to each position Deccan Value Advisors allocated the biggest weight to Herbalife Nutrition Ltd. (NYSE:HLF), around 16.96% of its 13F portfolio. Bronte Capital is also relatively very bullish on the stock, designating 16.1 percent of its 13F equity portfolio to HLF.

As aggregate interest increased, key money managers have been driving this bullishness. JS Capital, managed by Jonathan Soros, established the most outsized position in Herbalife Nutrition Ltd. (NYSE:HLF). JS Capital had $23.5 million invested in the company at the end of the quarter. Derek C. Schrier’s Indaba Capital Management also made a $19.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Dmitry Balyasny’s Balyasny Asset Management, Allan Teh’s Kamunting Street Capital, and Lee Ainslie’s Maverick Capital.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Herbalife Nutrition Ltd. (NYSE:HLF) but similarly valued. These stocks are LPL Financial Holdings Inc (NASDAQ:LPLA), BanColombia S.A. (NYSE:CIB), Assurant, Inc. (NYSE:AIZ), Encompass Health Corporation (NYSE:EHC), ADT Inc. (NYSE:ADT), Adaptive Biotechnologies Corporation (NASDAQ:ADPT), and Zai Lab Limited (NASDAQ:ZLAB). This group of stocks’ market caps are similar to HLF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LPLA 43 892669 10
CIB 9 69617 -2
AIZ 31 822763 -2
EHC 33 498955 0
ADT 20 207319 0
ADPT 28 2690388 10
ZLAB 27 416774 5
Average 27.3 799784 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.3 hedge funds with bullish positions and the average amount invested in these stocks was $800 million. That figure was $3052 million in HLF’s case. LPL Financial Holdings Inc (NASDAQ:LPLA) is the most popular stock in this table. On the other hand BanColombia S.A. (NYSE:CIB) is the least popular one with only 9 bullish hedge fund positions. Herbalife Nutrition Ltd. (NYSE:HLF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for HLF is 74.3. 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 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately HLF wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HLF were disappointed as the stock returned 0.4% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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