You Should Follow Hedge Funds Into These Tech and Healthcare Stocks

Two companies that have been in the middle of attention before the market opening and their stocks seem to be heading towards becoming trending on Wednesday are Citrix Systems, Inc. (NASDAQ:CTXS) and Conatus Pharmaceuticals Inc (NASDAQ:CNAT). Both companies also witness a bullish sentiment from hedge funds and in this article we will take a closer look at the developments that sparked the rallies of their stocks and will use the hedge fund data in order to identify their long-term potential.

There are many ways to determine whether a stock represents a good investment opportunity for the long-run, but assessing the hedge fund sentiment is one of the easiest and should be employed as one of the first steps while picking the next investment. We are not simply saying that, but we have actual research results to support this statement. Our backtests spanning through the period between 1999 and 2012 showed that hedge funds’ most popular picks generally lagged the market by an average of seven basis points per month, due to the fact that they included large- and mega-cap companies that have a lower risk profile, but are widely followed and price any developments much faster and more efficiently. On the other hand, smart money’s small-cap ideas showed much better returns, beating the market by almost one percentage point per month. With this in mind, we have compiled a strategy that involves imitating a portfolio of 15 most popular small-cap stocks among hedge funds and it has returned more than 118% since August 2012, outperforming the S&P 500 ETF (SPY) by some 60 percentage points (see more details here).

Among the stocks in our spotlight on Wednesday, Citrix Systems, Inc. (NASDAQ:CTXS) opened over 2% higher on the back of a Reuters report that said the company is still intending to sell itself as a whole company before engaging in the sale of separate assets. Citing people familiar with the matter, the source said that Citrix Systems, Inc. (NASDAQ:CTXS) continues its negotiations with buyout firms. In June, activist investor Paul Singer‘s Elliott Management made a move on Citrix Systems, Inc. (NASDAQ:CTXS) and after initiating a stake reached an agreement to get a seat on Citrix’s board of directors. Elliott has pushed for the sale of some assets right after initiating a stake in the company, including its GoTo business and NetScaler. The investor has also set a price target between $90 and $100 for the stock that can be reached if the company pursues the sales of the assets that represent valuable technology franchises but are not operated efficiently.

As the company was planning its sale, before Elliott’s involvement, hedge funds from our database seem to had anticipated the move and had amassed a stake of over 9% of Citrix Systems, Inc. (NASDAQ:CTXS)’s outstanding stock at the end of June. During the second quarter, the number of funds with long positions in the company went up by one to 39, while the aggregate value of their positions surged to $1.03 billion from $785.91 million at the end of March. Moreover, Elliott further increased its stake and in July, together with affiliates, held a 7.5% position, which contained 3.65 million shares. This is almost as much as the stake held by Brookside Capital, which was the largest shareholder of Citrix, among the funds we track, at the end of June and held 3.68 million shares. Ken Griffin’s Citadel Investment Group was also among the most bullish investors as it surged its position by over a 10-fold to 1.34 million shares.