Foamix Pharmaceuticals Ltd (NASDAQ:FOMX) is trending higher today after the company announced top-line results for one of its drug candidates. Foamix is engaged in a trial of FDX104, a foam designed to prevent the development of acneiform rash, which is a common side effect in patients undergoing treatment with the epidermal growth factor receptor antibody inhibitors (EGFRI). In a press release, the company announced that the drug registered positive results in the Phase II study, stating that FDX104 is “safe and well-tolerated.” Investors have happily greeted the news, sending the stock up by as much as 19% during the first hours of trading.
The third quarter was a rough one for most investors, as fears of an interest rate hike in the U.S, a weakening economy in China, and a stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards Foamix Pharmaceuticals Ltd (NASDAQ:FOMX), and what that likely means for the prospects of the company and its stock.
How are hedge funds trading Foamix Pharmaceuticals Ltd (NASDAQ:FOMX)?
Heading into Q4, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, down by 10% from one quarter earlier. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes considerably (or had already accumulated large positions).
Of the funds tracked by Insider Monkey, Julian Baker and Felix Baker’s Baker Bros. Advisors has the number one position in Foamix Pharmaceuticals Ltd (NASDAQ:FOMX), worth close to $15 million, accounting for 0.1% of its total 13F portfolio. The second-most bullish fund manager is Deerfield Management, run by James E. Flynn, which holds a $7 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism contain Richard Driehaus’ Driehaus Capital, Anand Parekh’s Alyeska Investment Group, and Christopher James’ Partner Fund Management.
Whether elite hedge funds collectively like a stock or not is an important metric to consider, as these large investors show a great level of skill and expertise when it comes to picking stocks. Over the last few years equity hedge funds have trailed the market by a large margin, but that’s mostly due to their hedging and short positions, which perform poorly in a bull market. Their long positions performed far better, especially their small-cap picks, which have the potential to beat the market by 95 basis points per month on average, as our backtests showed. Our small-cap strategy involves imitating a portfolio of the 15 most popular small-cap picks among hedge funds and it has returned 102% since August 2012, beating the S&P 500 ETF (SPY) by over 53 percentage points (read more details here).