Did Hedge Funds Make The Right Call On Arcus Biosciences, Inc. (RCUS) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Arcus Biosciences, Inc. (NYSE:RCUS) and determine whether hedge funds had an edge regarding this stock.

Arcus Biosciences, Inc. (NYSE:RCUS) was in 23 hedge funds’ portfolios at the end of March. RCUS has experienced an increase in support from the world’s most elite money managers lately. There were 15 hedge funds in our database with RCUS holdings at the end of the previous quarter. Our calculations also showed that RCUS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Lei Zhang Hillhouse Capital

Lei Zhang of Hillhouse Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind let’s analyze the recent hedge fund action encompassing Arcus Biosciences, Inc. (NYSE:RCUS).

How are hedge funds trading Arcus Biosciences, Inc. (NYSE:RCUS)?

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 53% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RCUS over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Arcus Biosciences, Inc. (NYSE:RCUS) was held by Partner Fund Management, which reported holding $11.2 million worth of stock at the end of September. It was followed by Hillhouse Capital Management with a $10.6 million position. Other investors bullish on the company included Millennium Management, EcoR1 Capital, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Partner Fund Management allocated the biggest weight to Arcus Biosciences, Inc. (NYSE:RCUS), around 0.92% of its 13F portfolio. Sectoral Asset Management is also relatively very bullish on the stock, dishing out 0.7 percent of its 13F equity portfolio to RCUS.

Consequently, specific money managers have jumped into Arcus Biosciences, Inc. (NYSE:RCUS) headfirst. Partner Fund Management, managed by Christopher James, assembled the most outsized position in Arcus Biosciences, Inc. (NYSE:RCUS). Partner Fund Management had $11.2 million invested in the company at the end of the quarter. Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management also initiated a $3.6 million position during the quarter. The other funds with new positions in the stock are Dmitry Balyasny’s Balyasny Asset Management, Panayotis Takis Sparaggis’s Alkeon Capital Management, and Michael Rockefeller and KarláKroeker’s Woodline Partners.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Arcus Biosciences, Inc. (NYSE:RCUS) but similarly valued. These stocks are Washington Trust Bancorp, Inc. (NASDAQ:WASH), NexPoint Residential Trust, Inc. (NYSE:NXRT), ChipMOS Technologies Inc (NASDAQ:IMOS), and Opus Bank (NASDAQ:OPB). This group of stocks’ market caps match RCUS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WASH 7 21341 2
NXRT 11 79180 -5
IMOS 2 29197 -1
OPB 8 28016 -2
Average 7 39434 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $39 million. That figure was $52 million in RCUS’s case. NexPoint Residential Trust, Inc. (NYSE:NXRT) is the most popular stock in this table. On the other hand ChipMOS Technologies Inc (NASDAQ:IMOS) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Arcus Biosciences, Inc. (NYSE:RCUS) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on RCUS as the stock returned 78.2% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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