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Did Hedge Funds Make The Right Call On CareDx, Inc. (CDNA)?

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 CareDx, Inc. (NASDAQ:CDNA) and determine whether hedge funds had an edge regarding this stock.

Is CareDx, Inc. (NASDAQ:CDNA) an exceptional investment today? The best stock pickers were getting less bullish. The number of long hedge fund positions shrunk by 8 lately. Our calculations also showed that CDNA 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.

GOTHAM ASSET MANAGEMENT

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s analyze the new hedge fund action surrounding CareDx, Inc. (NASDAQ:CDNA).

What have hedge funds been doing with CareDx, Inc. (NASDAQ:CDNA)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -32% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CDNA over the last 18 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 stakes significantly (or already accumulated large positions).

Is CDNA A Good Stock To Buy?

The largest stake in CareDx, Inc. (NASDAQ:CDNA) was held by Consonance Capital Management, which reported holding $58.1 million worth of stock at the end of September. It was followed by Casdin Capital with a $28.3 million position. Other investors bullish on the company included D E Shaw, Royce & Associates, and Intrinsic Edge Capital. In terms of the portfolio weights assigned to each position Consonance Capital Management allocated the biggest weight to CareDx, Inc. (NASDAQ:CDNA), around 4.33% of its 13F portfolio. Casdin Capital is also relatively very bullish on the stock, dishing out 3 percent of its 13F equity portfolio to CDNA.

Seeing as CareDx, Inc. (NASDAQ:CDNA) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few hedge funds who sold off their positions entirely last quarter. It’s worth mentioning that Peter S. Park’s Park West Asset Management said goodbye to the largest stake of all the hedgies watched by Insider Monkey, valued at an estimated $2.1 million in stock. Noam Gottesman’s fund, GLG Partners, also sold off its stock, about $2.1 million worth. These moves are important to note, as total hedge fund interest dropped by 8 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to CareDx, Inc. (NASDAQ:CDNA). We will take a look at Cardlytics, Inc. (NASDAQ:CDLX), Standard Motor Products, Inc. (NYSE:SMP), First Busey Corporation (NASDAQ:BUSE), and Sonos, Inc. (NASDAQ:SONO). This group of stocks’ market valuations are closest to CDNA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CDLX 26 292046 0
SMP 9 68050 -1
BUSE 11 27678 -1
SONO 33 139823 7
Average 19.75 131899 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $132 million. That figure was $145 million in CDNA’s case. Sonos, Inc. (NASDAQ:SONO) is the most popular stock in this table. On the other hand Standard Motor Products, Inc. (NYSE:SMP) is the least popular one with only 9 bullish hedge fund positions. CareDx, Inc. (NASDAQ:CDNA) is not the least popular stock in this group but hedge fund interest is still below average. 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on CDNA as the stock returned 50.9% since the end of March and outperformed the market by an even larger margin.

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