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The Baker Brothers Are Having One Amazing Year

Posted on October 28th, 2019

One has to think that Baker Brothers Advisors have put together one heck of a year. Two of their top three holdings are up by 80% or more in 2019, helping to make their top three holdings worth a combined $7.9 billion. It represents nearly 45.8% of the firm’s total assets under management, according to data compiled by WhaleWisdom.

Shares of Seattle Genetics Inc. (SGEN) have soared by more than 81% in 2019, while Acadia Pharmaceuticals, Inc. (ACAD) has seen its stock rise by more than 150%. With the two stocks soaring, so too has the Baker’s profits.


Seattle Genetics

At the end of the fourth quarter of 2018, the Bakers held 51.0 million shares of Seattle Genetics, with a market value of about $2.9 billion. The stock has soared since the end of September, following the reporting of positive data on two of its cancer drugs in development. Currently, the stock trades for around $102.70, which is up from $56.65 at the end of 2018. Despite selling about 990,000 shares in the second quarter of 2019, the Bakers still own about 50 million shares worth an approximate $5.1 billion, a profit of nearly $2.2 billion.

Acadia Pharmaceuticals

Acadia Pharmaceuticals’ stock has jumped even more. The Bakers held 39.7 million shares of Acadia at the end of 2018, a position with a market value of about $642 million. Shares of the bio-pharmaceutical company have risen from roughly $16.15 to $41.55 on October 25. The stock took a massive leap higher in early September, after the company announced positive results for its drug in development for dementia-related psychosis. Not only that, but the Bakers bought more shares of the stock in a secondary offering following those positive results, increasing their stake in the company to 41.1 million shares, while the market value has soared to around $1.63 billion. Of course, not all of the $1 billion gain is profit, because the Bakers bought more stock, but this is still a massive gain.

Overall, it is hard to deny that the investment advisor is having a stellar year. Not only that, but the firm’s second-largest holding, Incyte Corp. (INCY), is having a decent year too, up by more than 22%. Meanwhile, Alexion Pharmaceuticals Inc. (ALXN) is up about 8% and BeiGene Ltd. (BGEN) is down about 1% to round out their top 5 holdings.

Not a bad year for the investment firm. Not a bad year at all.

Hedge Funds Seem Torn Over Boeing

Posted on October 21st, 2019

The Boeing Co.’s (BA) good fortune at the start of 2019 has vanished after the grounding of its 737-MAX jets, following two crashes at the beginning of the year. Amazingly, despite the company’s major headline risk and even the pulling of its full-year guidance, the stock has remained relatively strong. However, that may all be about to change.

The stock fell to number 79 on the WhaleWisdom Heatmap in the second quarter, down from 26 in the first quarter. The heat map tracks the activity of the top 150 hedge funds as determined by the WhaleWisdom WhaleScore calculation.

Moving Down the Ranks

At the end of the second-quarter, 24 of these top 150 hedge funds held Boeing’s stock in their portfolio. The number of these funds increased from 18 in the first quarter. However, the number of these funds with the stock among their top 10 holdings fell to 4 during the second quarter from 6 in the first quarter. Additionally, the average position for the stock within these hedge fund portfolios fell to 61 from 42, a sign that most of the funds overall were reducing their positions in the stock.

BA 1Q’19

BA 2Q’19

The Rest May Be Left Holding the Bag

Surprisingly, the rest of the hedge fund industry was busy buying shares of Boeing. During the second quarter, the number of total shares among all hedge funds increased by a shockingly high 12% to roughly 18.3 million shares. In total, 25 funds created new positions and 54 funds added to existing holdings. Also, 29 funds sold out of the stock while 67 reduced their positions. The increasing share count versus the greater amount of sellers than buyers, would seem to suggest that the funds buying the stock were taking on bigger positions. This is the complete opposite of actions taken by the typical funds that account for the Whale Wisdom Heatmap.

Outlook Deteriorates

The financial outlook for Boeing has deteriorated. Just over the past 30 days, analysts have slashed earnings estimates for Boeing by 32.9%, and now see the company’s earnings plunging by almost 84% versus last year to $2.60 per share from $16.01 per share. Meanwhile, revenue is expected to decline by 18% in 2019 to $82.7 billion.

The big hope for investors seems to be the enormous backlog for the company of $474 billion. However, if that backlog starts to show any signs of deterioration, then perhaps the funds tracked by the heatmap had a good reason for their caution and will be proven correct.

General Electric Co. (GE) stock’s fall from grace has been historic.  Since December 2016, the stock has declined by about 70%, resulting in a market capitalization loss of about $200 billion. But interestingly, some of the smartest hedge funds were actively buying the stock during the second quarter.

The stock made it to the WhaleWisdom Heat Map during the second quarter, landing at 12 from a previously unranked position. The heat map assesses the activity of the top 150 hedge funds as determined by the WhaleWisdom WhaleScore calculation.

Rising on the Heat Map

Of the 150 hedge funds included in the heat map ranking, 17 funds own the stock. Nine funds increased their holdings during the second quarter, meanwhile, six of the funds reduced their positions.


Hedge Funds Piling In

Overall, the total number of hedge funds holding the stock rose in the second quarter. The aggregate amount of 13F shares held among hedge funds increased by 13.5% to 568.7 million shares in the second quarter. In total 19 funds created new positions, while 48 added to their holdings, as 14 funds closed out their positions and 49 reduced them.

A Return to Growth?

One reason we may see some hedge funds moving into GE is the anticipation for improving earnings. Currently analysts forecast earnings will climb by 18% in 2020 to $0.72 per share, followed by earnings growth of 27.5% in 2021 to $0.91 per share.

Based on those earnings estimates, the stock trades at roughly 12.4 times 2020 earnings estimates. That earnings multiple is lower than the S&P 500, which trades for roughly 16.5 times 2020 earnings, and it is lower than many of its peers. For example, Honeywell International Inc. (HON)  trades at a one-year forward earnings multiple of 18.6, while United Technologies Inc. (UTX) trades at 15.6.

Despite the appearance of an improving business, future revenue growth is expected to underwhelm. Revenue is forecast to fall by 4% in 2019 to $116.7 billion. That is followed by analysts’ forecast for revenue to fall again in 2020 by 6.7% to $108.9 billion, then increasing by 6% in 2021 to $115.4 billion.

Overall, GE stock has appeared to stabilize in recent months in the $7 to $9 range, and perhaps some investors felt that the stock may be worth the gamble especially if the business begins to improve and earnings growth returns.

Etsy Inc. (ETSY) has risen by just over 19.3% in 2019, slightly ahead of the S&P 500’s gain of 17.8%. But the stock fell sharply in the second quarter, after reporting better than expected earnings on weaker than forecast revenue. It appears that the pullback in the equity was used as an opportunity by hedge funds to pick up the stock.

The was stock was also added to the WhaleWisdom WhaleIndex 100 on August 15, following the hedge fund activity in the second quarter. But more recently, the analyst community has become very positive on the stock.

Hedge Funds Buy

During the second quarter, the total number of 13F shares increased by almost 12% to about 26.1 million shares. Overall, 21 funds created a new position in the stock, while 17 increased their positions. Meanwhile, nine funds closed their holdings as 20 reduced them. However, despite the optimism among hedge funds, the total number of 13F held by all institutions fell by over 3% to 111.26 million.

(Whale Wisdom)

Analysts Lift Targets

The stock’s struggles have continued in the weeks following the conclusion of the second quarter, with shares falling by roughly 8% through September 30. The lower price has resulted in the analyst community growing more bullish on the equity.

The average analysts’ price target on the stock has increased to $76.20, which is roughly 34.3% higher than the stock’s current price of $56.75 on October 4. The current price is about 2.7% higher than average price target of $74.23 on July 1. Also, the number of analysts rating the stock a buy or outperform has increased to 14 from 9 over that time. Additionally, the number of analysts rating the stock as a hold as dropped to 2 from 6. There are currently no analysts that rate the shares an underperform or sell, which remains unchanged.

Reasons to be Optimistic

One reason why investors and analysts may be getting more bullish is that the company has recently launched free shipping on purchases of more than $35 from the same merchant.  Additionally, the company agreed to purchase Reverb Holdings for $275 million in July. Reverb is an online marketplace for new, used and vintage musical gear.

Etsy’s shares have bounced back some since the beginning of September. When updated holdings start coming out in November, it should reveal if hedge fund investors were still buying the stock during the third quarter pullback, or if they were selling as the analyst community became more bullish.

The S&P 500 has had a very strong run in 2019, with the index rising by around 18.2%. However, this year’s gains are misleading, due to the sharp end of year sell-off of 2018. Over the past 52-weeks, the S&P 500 has increased by a lackluster 1.9%, but perhaps that is all about to change for the better.

Interestingly, the SPDR S&P 500 ETF (SPY), a proxy for the S&P 500, has seen a lot of interest among some of the smartest hedge funds. In fact, for the second quarter of 2019, the ETF was ranked number one on the WhaleWisdom Heat Map. The heat map ranking assesses the activity of the top 150 hedge funds as determined by the WhaleWisdom WhaleScore calculation.

Buying The Index

The ETF saw a big rise in its ranking this quarter after sitting at number 74 in the first quarter. At the end of the second quarter, 15 of the top 150 funds held the ETF in their portfolio, with 3 holding the position among their top 10. In total, five funds increased their holdings while 8 reduced them.

A Divergent View

The bullish view of the ETF comes in stark contrast to what the rest of the hedge fund industry was doing during the quarter. Overall, hedge funds were reducing their holdings of the S&P 500 ETF, with the total number of 13F shares held falling by 15.7% to 36.4 million shares.

Headline Risk

Certainly there may be a good reason for this divergence, as volatility in the broader stock market continues to gyrate on trade headlines between the US and China. May and June saw a tremendous amount of volatility in the market as trade tensions between the two countries rose sharply, and as a new round of tariffs were placed on imports from China.

Recession Fears

Additionally, over recent months recession concerns have risen sharply among some investors, resulting in yields on Treasury rates plunging. However, while concerns among the broader sector were taken as a negative signal and a bearish indicator, perhaps the better performing funds saw this as an opportunity to take advantage of the stock market’s weakness and accumulate assets.

While rising geopolitical risk and fears of a recession have created a stagnate stock market, perhaps the best signal to take away from the divergent views among the hedge fund industry is that an opportunity for investors with a long enough time horizon has been created.