At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Zai Lab Limited (NASDAQ:ZLAB) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Zai Lab Limited (NASDAQ:ZLAB) a good investment right now? Money managers were buying. The number of long hedge fund positions increased by 5 in recent months. Zai Lab Limited (NASDAQ:ZLAB) was in 27 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 26. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ZLAB 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.
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 was 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Kris Jenner - Rock Springs Capital
Kris Jenner of Rock Springs Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Now let's review the key hedge fund action encompassing Zai Lab Limited (NASDAQ:ZLAB).
Hedge fund activity in Zai Lab Limited (NASDAQ:ZLAB)
At Q2's end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 23% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in ZLAB a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Segantii Capital, managed by Simon Sadler, holds the largest position in Zai Lab Limited (NASDAQ:ZLAB). Segantii Capital has a $79.1 million position in the stock, comprising 5.6% of its 13F portfolio. Sitting at the No. 2 spot is Rock Springs Capital Management, managed by Kris Jenner, Gordon Bussard, Graham McPhail, which holds a $66.8 million position; 1.8% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish comprise David Kowitz and Sheldon Kasowitz's Indus Capital, Lei Zhang's Hillhouse Capital Management and Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors. In terms of the portfolio weights assigned to each position Prince Street Capital Management allocated the biggest weight to Zai Lab Limited (NASDAQ:ZLAB), around 9.27% of its 13F portfolio. Indus Capital is also relatively very bullish on the stock, setting aside 8.23 percent of its 13F equity portfolio to ZLAB.
Now, key money managers have jumped into Zai Lab Limited (NASDAQ:ZLAB) headfirst. Jericho Capital Asset Management, managed by Josh Resnick, created the largest position in Zai Lab Limited (NASDAQ:ZLAB). Jericho Capital Asset Management had $8.9 million invested in the company at the end of the quarter. Ray Dalio's Bridgewater Associates also initiated a $5.2 million position during the quarter. The other funds with brand new ZLAB positions are Panayotis Takis Sparaggis's Alkeon Capital Management, Ken Griffin's Citadel Investment Group, and Ronald Hua's Qtron Investments.
Let's go over hedge fund activity in other stocks similar to Zai Lab Limited (NASDAQ:ZLAB). We will take a look at Jazz Pharmaceuticals Plc (NASDAQ:JAZZ), Ares Capital Corporation (NASDAQ:ARCC), National Retail Properties, Inc. (NYSE:NNN), Lumentum Holdings Inc (NASDAQ:LITE), Smartsheet Inc. (NYSE:SMAR), SYNNEX Corporation (NYSE:SNX), and OGE Energy Corp. (NYSE:OGE). This group of stocks' market values are similar to ZLAB's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JAZZ,34,1164286,5 ARCC,19,150961,-7 NNN,17,86331,-2 LITE,42,678388,8 SMAR,47,2024773,6 SNX,24,502344,0 OGE,25,174922,4 Average,29.7,683144,2 [/table]
As you can see these stocks had an average of 29.7 hedge funds with bullish positions and the average amount invested in these stocks was $683 million. That figure was $417 million in ZLAB's case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand National Retail Properties, Inc. (NYSE:NNN) is the least popular one with only 17 bullish hedge fund positions. Zai Lab Limited (NASDAQ:ZLAB) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ZLAB is 56.7. 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 negative signal and 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately ZLAB wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ZLAB investors were disappointed as the stock returned -3.4% since Q2 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 most of these stocks already outperformed the market in 2020.
