Did Hedge Funds Drop The Ball On Arrowhead Research Corp (ARWR) ?

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 750 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Arrowhead Research Corp (NASDAQ:ARWR) in this article.

Arrowhead Research Corp (NASDAQ:ARWR) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. ARWR was in 15 hedge funds’ portfolios at the end of the third quarter of 2019. There were 16 hedge funds in our database with ARWR positions at the end of the previous quarter. Our calculations also showed that ARWR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

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. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a glance at the key hedge fund action encompassing Arrowhead Research Corp (NASDAQ:ARWR).

Hedge fund activity in Arrowhead Research Corp (NASDAQ:ARWR)

At the end of the third quarter, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ARWR over the last 17 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Is ARWR A Good Stock To Buy?

The largest stake in Arrowhead Research Corp (NASDAQ:ARWR) was held by Vivo Capital, which reported holding $61.5 million worth of stock at the end of September. It was followed by D E Shaw with a $20.7 million position. Other investors bullish on the company included Renaissance Technologies, Farallon Capital, and Adage Capital Management. In terms of the portfolio weights assigned to each position Vivo Capital allocated the biggest weight to Arrowhead Research Corp (NASDAQ:ARWR), around 7% of its 13F portfolio. Farallon Capital is also relatively very bullish on the stock, setting aside 0.19 percent of its 13F equity portfolio to ARWR.

Due to the fact that Arrowhead Research Corp (NASDAQ:ARWR) has witnessed a decline in interest from the smart money, it’s safe to say that there was a specific group of funds that decided to sell off their entire stakes by the end of the third quarter. It’s worth mentioning that Marc Schneidman’s Aquilo Capital Management dropped the biggest position of all the hedgies tracked by Insider Monkey, totaling close to $14.8 million in call options. Israel Englander’s fund, Millennium Management, also cut its call options, about $2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Arrowhead Research Corp (NASDAQ:ARWR) but similarly valued. We will take a look at Meritage Homes Corp (NYSE:MTH), Acacia Communications, Inc. (NASDAQ:ACIA), Fluor Corporation (NYSE:FLR), and Brooks Automation, Inc. (NASDAQ:BRKS). This group of stocks’ market values match ARWR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MTH 25 360789 10
ACIA 25 507691 -3
FLR 18 210283 -3
BRKS 12 153378 -1
Average 20 308035 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $308 million. That figure was $156 million in ARWR’s case. Meritage Homes Corp (NYSE:MTH) is the most popular stock in this table. On the other hand Brooks Automation, Inc. (NASDAQ:BRKS) is the least popular one with only 12 bullish hedge fund positions. Arrowhead Research Corp (NASDAQ:ARWR) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on ARWR as the stock returned 159.1% during the first two months of Q4 and outperformed the market by an even larger margin.

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