Did Hedge Funds Make The Right Call On Arvinas, Inc. (ARVN) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Arvinas, Inc. (NASDAQ:ARVN) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Arvinas, Inc. (NASDAQ:ARVN) has seen a decrease in support from the world’s most elite money managers lately. ARVN was in 25 hedge funds’ portfolios at the end of the first quarter of 2020. There were 26 hedge funds in our database with ARVN positions at the end of the previous quarter. Our calculations also showed that ARVN 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.

Michael Castor of Sio Capital

Michael Castor of Sio Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. Now we’re going to go over the key hedge fund action surrounding Arvinas, Inc. (NASDAQ:ARVN).

What does smart money think about Arvinas, Inc. (NASDAQ:ARVN)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the fourth quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in ARVN a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Is ARVN A Good Stock To Buy?

Among these funds, RA Capital Management held the most valuable stake in Arvinas, Inc. (NASDAQ:ARVN), which was worth $148 million at the end of the third quarter. On the second spot was EcoR1 Capital which amassed $61.6 million worth of shares. Deerfield Management, OrbiMed Advisors, and Hillhouse Capital Management 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 EcoR1 Capital allocated the biggest weight to Arvinas, Inc. (NASDAQ:ARVN), around 6.43% of its 13F portfolio. Acuta Capital Partners is also relatively very bullish on the stock, setting aside 5.47 percent of its 13F equity portfolio to ARVN.

Since Arvinas, Inc. (NASDAQ:ARVN) has experienced bearish sentiment from the smart money, it’s safe to say that there exists a select few fund managers that elected to cut their entire stakes in the first quarter. It’s worth mentioning that Joseph Edelman’s Perceptive Advisors sold off the biggest stake of the 750 funds followed by Insider Monkey, valued at an estimated $16.4 million in stock, and Michael Castor’s Sio Capital was right behind this move, as the fund said goodbye to about $1.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Arvinas, Inc. (NASDAQ:ARVN) but similarly valued. We will take a look at NIC Inc. (NASDAQ:EGOV), 21Vianet Group Inc (NASDAQ:VNET), KAR Auction Services Inc (NYSE:KAR), and ForeScout Technologies, Inc. (NASDAQ:FSCT). This group of stocks’ market values are closest to ARVN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EGOV 17 105397 -5
VNET 15 129811 -1
KAR 21 203698 -5
FSCT 33 421646 12
Average 21.5 215138 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $215 million. That figure was $431 million in ARVN’s case. ForeScout Technologies, Inc. (NASDAQ:FSCT) is the most popular stock in this table. On the other hand 21Vianet Group Inc (NASDAQ:VNET) is the least popular one with only 15 bullish hedge fund positions. Arvinas, Inc. (NASDAQ:ARVN) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ARVN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ARVN were disappointed as the stock returned -16.8% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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