Was The Smart Money Right About Illumina, Inc. (ILMN)?

Reymerlyn Martin
·6 min read

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Illumina, Inc. (NASDAQ:ILMN)? The smart money sentiment can provide an answer to this question.

Illumina, Inc. (NASDAQ:ILMN) was in 41 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 62. ILMN shareholders have witnessed an increase in activity from the world's largest hedge funds in recent months. There were 34 hedge funds in our database with ILMN positions at the end of the first quarter. Our calculations also showed that ILMN 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.

Matthew Hulsizer PEAK6 Capital
Matthew Hulsizer PEAK6 Capital

Matthew Hulsizer of PEAK6 Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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. With all of this in mind let's take a peek at the latest hedge fund action regarding Illumina, Inc. (NASDAQ:ILMN).

What have hedge funds been doing with Illumina, Inc. (NASDAQ:ILMN)?

At the end of the second quarter, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from the first quarter of 2020. On the other hand, there were a total of 43 hedge funds with a bullish position in ILMN a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Generation Investment Management was the largest shareholder of Illumina, Inc. (NASDAQ:ILMN), with a stake worth $439.4 million reported as of the end of September. Trailing Generation Investment Management was GuardCap Asset Management, which amassed a stake valued at $223.7 million. Select Equity Group, Adage Capital Management, and Citadel Investment Group 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 GuardCap Asset Management allocated the biggest weight to Illumina, Inc. (NASDAQ:ILMN), around 8.59% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, setting aside 2.53 percent of its 13F equity portfolio to ILMN.

As one would reasonably expect, some big names have jumped into Illumina, Inc. (NASDAQ:ILMN) headfirst. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, established the biggest position in Illumina, Inc. (NASDAQ:ILMN). LMR Partners had $5 million invested in the company at the end of the quarter. Steve Zheng's Deepcurrents Investment Group also initiated a $4 million position during the quarter. The other funds with new positions in the stock are Israel Englander's Millennium Management, Krishen Sud's Sivik Global Healthcare, and Matthew Hulsizer's PEAK6 Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Illumina, Inc. (NASDAQ:ILMN) but similarly valued. We will take a look at Marsh & McLennan Companies, Inc. (NYSE:MMC), Uber Technologies, Inc. (NYSE:UBER), Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR), CSX Corporation (NASDAQ:CSX), Air Products & Chemicals, Inc. (NYSE:APD), Vale SA (NYSE:VALE), and The Sherwin-Williams Company (NYSE:SHW). All of these stocks' market caps resemble ILMN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MMC,38,846796,1 UBER,94,5388672,-3 PBR,29,1409778,-3 CSX,46,2290942,-11 APD,37,439684,-4 VALE,29,1613921,1 SHW,53,1830766,-4 Average,46.6,1974366,-3.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 46.6 hedge funds with bullish positions and the average amount invested in these stocks was $1974 million. That figure was $1193 million in ILMN's case. Uber Technologies, Inc. (NYSE:UBER) is the most popular stock in this table. On the other hand Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR) is the least popular one with only 29 bullish hedge fund positions. Illumina, Inc. (NASDAQ:ILMN) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ILMN is 39.1. 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 30% in 2020 through October 23rd and surpassed the market by 21 percentage points. Unfortunately ILMN wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ILMN investors were disappointed as the stock returned -12.6% since the end of June (through 10/23) 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.

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

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