Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA).
Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) shareholders have witnessed a decrease in hedge fund sentiment recently. KNSA was in 8 hedge funds’ portfolios at the end of the third quarter of 2019. There were 9 hedge funds in our database with KNSA positions at the end of the previous quarter. Our calculations also showed that KNSA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
James E. Flynn of Deerfield Management
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 peek at the fresh hedge fund action surrounding Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA).
How have hedgies been trading Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA)?
At the end of the third quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KNSA over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
The largest stake in Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) was held by Baker Bros. Advisors, which reported holding $23.8 million worth of stock at the end of September. It was followed by Hillhouse Capital Management with a $15.9 million position. Other investors bullish on the company included Deerfield Management, Vivo Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Vivo Capital allocated the biggest weight to Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA), around 0.82% of its 13F portfolio. Deerfield Management is also relatively very bullish on the stock, dishing out 0.44 percent of its 13F equity portfolio to KNSA.
Seeing as Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) has experienced falling interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of money managers who sold off their positions entirely last quarter. Interestingly, David E. Shaw’s D E Shaw dumped the biggest stake of all the hedgies monitored by Insider Monkey, worth close to $0.4 million in stock. Gavin Saitowitz and Cisco J. del Valle’s fund, Springbok Capital, also said goodbye to its stock, about $0 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 1 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA). We will take a look at Star Group, L.P. (NYSE:SGU), Myovant Sciences Ltd. (NYSE:MYOV), Akebia Therapeutics Inc (NASDAQ:AKBA), and Gilat Satellite Networks Ltd. (NASDAQ:GILT). This group of stocks’ market valuations are closest to KNSA’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SGU | 8 | 81132 | 0 |
| MYOV | 14 | 40493 | 6 |
| AKBA | 15 | 156509 | 1 |
| GILT | 2 | 25553 | 0 |
| Average | 9.75 | 75922 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $76 million. That figure was $66 million in KNSA’s case. Akebia Therapeutics Inc (NASDAQ:AKBA) is the most popular stock in this table. On the other hand Gilat Satellite Networks Ltd. (NASDAQ:GILT) is the least popular one with only 2 bullish hedge fund positions. Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) 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 KNSA as the stock returned 25.1% 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.
