Did Hedge Funds Make The Right Call On IVERIC bio, Inc. (ISEE) ?

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 IVERIC bio, Inc. (NASDAQ:ISEE) and determine whether hedge funds had an edge regarding this stock.

IVERIC bio, Inc. (NASDAQ:ISEE) was in 23 hedge funds’ portfolios at the end of March. ISEE shareholders have witnessed an increase in hedge fund sentiment lately. There were 22 hedge funds in our database with ISEE positions at the end of the previous quarter. Our calculations also showed that ISEE 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Tim Lynch of Stonepine Capital

Tim Lynch of Stonepine Capital

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 we’re going to review the fresh hedge fund action regarding IVERIC bio, Inc. (NASDAQ:ISEE).

How are hedge funds trading IVERIC bio, Inc. (NASDAQ:ISEE)?

Heading into the second quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ISEE over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

Among these funds, Consonance Capital Management held the most valuable stake in IVERIC bio, Inc. (NASDAQ:ISEE), which was worth $10.8 million at the end of the third quarter. On the second spot was Stonepine Capital which amassed $8.9 million worth of shares. Deerfield Management, Baker Bros. Advisors, and Soleus 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 Stonepine Capital allocated the biggest weight to IVERIC bio, Inc. (NASDAQ:ISEE), around 9.4% of its 13F portfolio. Soleus Capital is also relatively very bullish on the stock, earmarking 6.43 percent of its 13F equity portfolio to ISEE.

Consequently, key hedge funds were breaking ground themselves. Stonepine Capital, managed by Timothy P. Lynch, created the largest position in IVERIC bio, Inc. (NASDAQ:ISEE). Stonepine Capital had $8.9 million invested in the company at the end of the quarter. Manfred Yu’s Acuta Capital Partners also initiated a $0.5 million position during the quarter. The other funds with brand new ISEE positions are Doron Breen and Mori Arkin’s Sphera Global Healthcare Fund, Peter Muller’s PDT Partners, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Let’s also examine hedge fund activity in other stocks similar to IVERIC bio, Inc. (NASDAQ:ISEE). We will take a look at Stellus Capital Investment Corporation (NYSE:SCM), Eagle Bulk Shipping Inc. (NASDAQ:EGLE), Empresa Distribuidora y Comercializadora Norte Sociedad Anonima (NYSE:EDN), and Mastech Digital, Inc. (NYSE:MHH). This group of stocks’ market valuations are closest to ISEE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SCM 2 2253 0
EGLE 8 85844 -4
EDN 2 73 -3
MHH 4 1750 2
Average 4 22480 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $74 million in ISEE’s case. Eagle Bulk Shipping Inc. (NASDAQ:EGLE) is the most popular stock in this table. On the other hand Stellus Capital Investment Corporation (NYSE:SCM) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks IVERIC bio, Inc. (NASDAQ:ISEE) 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 ISEE as the stock returned 48.3% 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.