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Did Hedge Funds Make The Right Call On Constellation Pharmaceuticals, Inc. (CNST) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) based on that data and determine whether they were really smart about the stock.

Is Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) a healthy stock for your portfolio? Prominent investors were getting less bullish. The number of long hedge fund positions went down by 2 in recent months. Our calculations also showed that CNST 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 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 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 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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. Keeping this in mind we’re going to take a peek at the latest hedge fund action surrounding Constellation Pharmaceuticals, Inc. (NASDAQ:CNST).

Hedge fund activity in Constellation Pharmaceuticals, Inc. (NASDAQ:CNST)

At Q1’s end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from one quarter earlier. On the other hand, there were a total of 8 hedge funds with a bullish position in CNST a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Avoro Capital Advisors (venBio Select Advisor) held the most valuable stake in Constellation Pharmaceuticals, Inc. (NASDAQ:CNST), which was worth $114.7 million at the end of the third quarter. On the second spot was Cormorant Asset Management which amassed $64.1 million worth of shares. Great Point Partners, Point72 Asset Management, and Casdin Capital 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 Great Point Partners allocated the biggest weight to Constellation Pharmaceuticals, Inc. (NASDAQ:CNST), around 6.49% of its 13F portfolio. Ghost Tree Capital is also relatively very bullish on the stock, setting aside 5.42 percent of its 13F equity portfolio to CNST.

Due to the fact that Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of fund managers who were dropping their entire stakes in the first quarter. It’s worth mentioning that Arsani William’s Logos Capital dropped the biggest investment of the 750 funds watched by Insider Monkey, valued at about $4.8 million in stock. Eric Bannasch’s fund, Cadian Capital, also cut its stock, about $4.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 2 funds in the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) but similarly valued. We will take a look at RLJ Lodging Trust (NYSE:RLJ), Stitch Fix, Inc. (NASDAQ:SFIX), Sunoco LP (NYSE:SUN), and Yelp Inc (NYSE:YELP). This group of stocks’ market valuations match CNST’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RLJ 20 55694 3
SFIX 16 79738 -12
SUN 4 7173 -2
YELP 25 235924 -2
Average 16.25 94632 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $427 million in CNST’s case. Yelp Inc (NYSE:YELP) is the most popular stock in this table. On the other hand Sunoco LP (NYSE:SUN) is the least popular one with only 4 bullish hedge fund positions. Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) 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 CNST wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CNST were disappointed as the stock returned -4.4% 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.