Hedge Funds Have Never Been This Bullish On Intercept Pharmaceuticals Inc (ICPT)

Debasis Saha

Sat, Mar 28, 2020, 7:23 PM 7 min read

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on December 31st. We at Insider Monkey have made an extensive database of more than 835 of those established hedge funds and famous value investors' filings. In this article, we analyze how these elite funds and prominent investors traded Intercept Pharmaceuticals Inc (NASDAQ:ICPT) based on those filings.

Is Intercept Pharmaceuticals Inc (NASDAQ:ICPT) going to take off soon? Money managers are becoming more confident. The number of long hedge fund positions went up by 4 in recent months. Our calculations also showed that ICPT isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

[caption id="attachment_339332" align="aligncenter" width="400"]

Alex Denner of Sarissa Capital Management[/caption]

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind let's analyze the new hedge fund action regarding Intercept Pharmaceuticals Inc (NASDAQ:ICPT).

How are hedge funds trading Intercept Pharmaceuticals Inc (NASDAQ:ICPT)?

At Q4's end, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the third quarter of 2019. On the other hand, there were a total of 21 hedge funds with a bullish position in ICPT a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

The largest stake in Intercept Pharmaceuticals Inc (NASDAQ:ICPT) was held by Rima Senvest Management, which reported holding $151.1 million worth of stock at the end of September. It was followed by Sarissa Capital Management with a $106.6 million position. Other investors bullish on the company included Samsara BioCapital, Two Sigma Advisors, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Samsara BioCapital allocated the biggest weight to Intercept Pharmaceuticals Inc (NASDAQ:ICPT), around 23.97% of its 13F portfolio. Rima Senvest Management is also relatively very bullish on the stock, setting aside 10.27 percent of its 13F equity portfolio to ICPT.

As industrywide interest jumped, some big names have been driving this bullishness. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, assembled the most valuable position in Intercept Pharmaceuticals Inc (NASDAQ:ICPT). LMR Partners had $18.6 million invested in the company at the end of the quarter. Renaissance Technologies also made a $11.4 million investment in the stock during the quarter. The following funds were also among the new ICPT investors: Dmitry Balyasny's Balyasny Asset Management, Israel Englander's Millennium Management, and D. E. Shaw's D E Shaw.

Let's check out hedge fund activity in other stocks similar to Intercept Pharmaceuticals Inc (NASDAQ:ICPT). We will take a look at Wintrust Financial Corporation (NASDAQ:WTFC), PNM Resources, Inc. (NYSE:PNM), RLI Corp. (NYSE:RLI), and Valvoline Inc. (NYSE:VVV). This group of stocks' market valuations match ICPT's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WTFC,21,274629,1 PNM,19,367854,3 RLI,25,229633,9 VVV,27,371950,-2 Average,23,311017,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $311 million. That figure was $485 million in ICPT's case. Valvoline Inc. (NYSE:VVV) is the most popular stock in this table. On the other hand PNM Resources, Inc. (NYSE:PNM) is the least popular one with only 19 bullish hedge fund positions. Intercept Pharmaceuticals Inc (NASDAQ:ICPT) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately ICPT wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ICPT were disappointed as the stock returned -50% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.