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2019 Review: Top Hedge Fund Stocks vs. Arena Pharmaceuticals, Inc. (ARNA)

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).

Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 29 hedge funds’ portfolios at the end of the third quarter of 2019. At the end of this article we will also compare ARNA to other stocks including Covanta Holding Corporation (NYSE:CVA), Alamos Gold Inc (NYSE:AGI), and Halozyme Therapeutics, Inc. (NASDAQ:HALO) to get a better sense of its popularity.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we’re going to take a look at the recent hedge fund action encompassing Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).

How have hedgies been trading Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)?

At Q3’s end, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ARNA over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) was held by Partner Fund Management, which reported holding $104 million worth of stock at the end of September. It was followed by Perceptive Advisors with a $43.6 million position. Other investors bullish on the company included Alyeska Investment Group, Citadel Investment Group, and GLG Partners. In terms of the portfolio weights assigned to each position Prosight Capital allocated the biggest weight to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), around 4.14% of its 13F portfolio. Partner Fund Management is also relatively very bullish on the stock, setting aside 3.07 percent of its 13F equity portfolio to ARNA.

Judging by the fact that Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has experienced declining sentiment from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of money managers who were dropping their entire stakes last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest investment of all the hedgies monitored by Insider Monkey, worth close to $4.7 million in stock. Kamran Moghtaderi’s fund, Eversept Partners, also said goodbye to its stock, about $4.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) but similarly valued. We will take a look at Covanta Holding Corporation (NYSE:CVA), Alamos Gold Inc (NYSE:AGI), Halozyme Therapeutics, Inc. (NASDAQ:HALO), and Independent Bank Group Inc (NASDAQ:IBTX). All of these stocks’ market caps are similar to ARNA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CVA 14 102739 -1
AGI 15 220502 3
HALO 24 154349 5
IBTX 12 100233 3
Average 16.25 144456 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $144 million. That figure was $293 million in ARNA’s case. Halozyme Therapeutics, Inc. (NASDAQ:HALO) is the most popular stock in this table. On the other hand Independent Bank Group Inc (NASDAQ:IBTX) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is more popular among hedge funds. 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. Unfortunately ARNA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ARNA were disappointed as the stock returned 16.6% in 2019 and trailed 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 65 percent of these stocks outperformed the market in 2019.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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