Were Hedge Funds Right About Varian Medical Systems, Inc. (VAR)?

Reymerlyn Martin

Wed, Mar 18, 2020, 7:06 PM 6 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 (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Varian Medical Systems, Inc. (NYSE:VAR) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Varian Medical Systems, Inc. (NYSE:VAR) shareholders have witnessed an increase in activity from the world's largest hedge funds recently. Our calculations also showed that VAR isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).

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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_30570" align="aligncenter" width="400"]

James Dinan of York 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. Keeping this in mind let's take a look at the fresh hedge fund action regarding Varian Medical Systems, Inc. (NYSE:VAR).

Hedge fund activity in Varian Medical Systems, Inc. (NYSE:VAR)

At Q4's end, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the previous quarter. By comparison, 30 hedge funds held shares or bullish call options in VAR a year ago. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

More specifically, AQR Capital Management was the largest shareholder of Varian Medical Systems, Inc. (NYSE:VAR), with a stake worth $82.7 million reported as of the end of September. Trailing AQR Capital Management was Citadel Investment Group, which amassed a stake valued at $78.4 million. Alyeska Investment Group, York Capital Management, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position York Capital Management allocated the biggest weight to Varian Medical Systems, Inc. (NYSE:VAR), around 3.55% of its 13F portfolio. Integral Health Asset Management is also relatively very bullish on the stock, designating 3.32 percent of its 13F equity portfolio to VAR.

Consequently, key hedge funds have been driving this bullishness. York Capital Management, managed by James Dinan, established the most outsized position in Varian Medical Systems, Inc. (NYSE:VAR). York Capital Management had $61.4 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also made a $11.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Bhagwan Jay Rao's Integral Health Asset Management, Steve Cohen's Point72 Asset Management, and Donald Sussman's Paloma Partners.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Varian Medical Systems, Inc. (NYSE:VAR) but similarly valued. We will take a look at Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY), Equity Lifestyle Properties, Inc. (NYSE:ELS), Lyft, Inc. (NASDAQ:LYFT), and Icahn Enterprises LP (NASDAQ:IEP). This group of stocks' market values are similar to VAR's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALNY,33,937654,3 ELS,23,480119,2 LYFT,45,984290,10 IEP,4,12205892,-1 Average,26.25,3651989,3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $3652 million. That figure was $607 million in VAR's case. Lyft, Inc. (NASDAQ:LYFT) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 4 bullish hedge fund positions. Varian Medical Systems, Inc. (NYSE:VAR) 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 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately VAR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on VAR were disappointed as the stock returned -27.1% 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.