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 Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) and determine whether hedge funds had an edge regarding this stock.
Hedge fund interest in Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare DCPH to other stocks including Kohl’s Corporation (NYSE:KSS), UMB Financial Corporation (NASDAQ:UMBF), and Alkermes Plc (NASDAQ:ALKS) to get a better sense of its popularity.
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In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the latest hedge fund action surrounding Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH).
What have hedge funds been doing with Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH)?
At Q1’s end, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in DCPH over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
More specifically, Redmile Group was the largest shareholder of Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), with a stake worth $210.6 million reported as of the end of September. Trailing Redmile Group was Avoro Capital Advisors (venBio Select Advisor), which amassed a stake valued at $82.3 million. OrbiMed Advisors, Farallon Capital, and Polar 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 Redmile Group allocated the biggest weight to Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), around 5.91% of its 13F portfolio. Eversept Partners is also relatively very bullish on the stock, setting aside 4.32 percent of its 13F equity portfolio to DCPH.
Judging by the fact that Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there is a sect of fund managers that slashed their full holdings last quarter. Interestingly, Steve Cohen’s Point72 Asset Management cut the largest position of all the hedgies followed by Insider Monkey, worth about $11.3 million in stock, and Christiana Goh Bardon’s Burrage Capital Management was right behind this move, as the fund cut about $3.7 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) but similarly valued. We will take a look at Kohl’s Corporation (NYSE:KSS), UMB Financial Corporation (NASDAQ:UMBF), Alkermes Plc (NASDAQ:ALKS), and Teradata Corporation (NYSE:TDC). This group of stocks’ market caps match DCPH’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $218 million. That figure was $604 million in DCPH’s case. Alkermes Plc (NASDAQ:ALKS) is the most popular stock in this table. On the other hand UMB Financial Corporation (NASDAQ:UMBF) is the least popular one with only 15 bullish hedge fund positions. Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) is not the most popular stock in this group but hedge fund interest is still above 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on DCPH as the stock returned 45.1% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.