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Did Hedge Funds Drop The Ball On Kodiak Sciences Inc (KOD) ?

Is Kodiak Sciences Inc (NASDAQ:KOD) a good equity to bet on right now? We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Kodiak Sciences Inc (NASDAQ:KOD) a buy here? Money managers are taking a bearish view. The number of long hedge fund bets dropped by 2 lately. Our calculations also showed that KOD isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). KOD was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. There were 8 hedge funds in our database with KOD positions at the end of the previous quarter.
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.

Peter Kolchinsky of RA Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. 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 already gained 20 percent. Keeping this in mind let’s go over the key hedge fund action encompassing Kodiak Sciences Inc (NASDAQ:KOD).

Hedge fund activity in Kodiak Sciences Inc (NASDAQ:KOD)

At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in KOD a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Among these funds, Baker Bros. Advisors held the most valuable stake in Kodiak Sciences Inc (NASDAQ:KOD), which was worth $131.5 million at the end of the third quarter. On the second spot was Perceptive Advisors which amassed $45.1 million worth of shares. RA Capital Management, venBio Select Advisor, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Perceptive Advisors allocated the biggest weight to Kodiak Sciences Inc (NASDAQ:KOD), around 1.21% of its 13F portfolio. Baker Bros. Advisors is also relatively very bullish on the stock, dishing out 0.89 percent of its 13F equity portfolio to KOD.

Because Kodiak Sciences Inc (NASDAQ:KOD) has faced a decline in interest from the smart money, logic holds that there lies a certain “tier” of hedgies who sold off their positions entirely heading into Q4. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace said goodbye to the biggest position of the 750 funds watched by Insider Monkey, comprising close to $1.1 million in stock. Ken Griffin’s fund, Citadel Investment Group, also cut its stock, about $0.2 million worth. These moves are interesting, as total hedge fund interest fell by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Kodiak Sciences Inc (NASDAQ:KOD). These stocks are GTT Communications Inc (NYSE:GTT), A10 Networks Inc (NYSE:ATEN), Gogo Inc (NASDAQ:GOGO), and China Yuchai International Limited (NYSE:CYD). This group of stocks’ market values resemble KOD’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GTT 13 183431 -5
ATEN 17 105496 2
GOGO 17 104257 2
CYD 9 55431 0
Average 14 112154 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $112 million. That figure was $205 million in KOD’s case. A10 Networks Inc (NYSE:ATEN) is the most popular stock in this table. On the other hand China Yuchai International Limited (NYSE:CYD) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Kodiak Sciences Inc (NASDAQ:KOD) is even less popular than CYD. Hedge funds clearly dropped the ball on KOD as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 KOD as the stock returned 105.8% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

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