Did Hedge Funds Make The Right Call On Mersana Therapeutics, Inc. (MRSN) ?

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 Mersana Therapeutics, Inc. (NASDAQ:MRSN) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Mersana Therapeutics, Inc. (NASDAQ:MRSN) has seen an increase in enthusiasm from smart money of late. Our calculations also showed that MRSN 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.

Alex Denner Sarissa Capital

Alex Denner of Sarissa Capital 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. With all of this in mind we’re going to review the latest hedge fund action encompassing Mersana Therapeutics, Inc. (NASDAQ:MRSN).

How are hedge funds trading Mersana Therapeutics, Inc. (NASDAQ:MRSN)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from the fourth quarter of 2019. By comparison, 16 hedge funds held shares or bullish call options in MRSN a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in Mersana Therapeutics, Inc. (NASDAQ:MRSN) was held by Sarissa Capital Management, which reported holding $21.9 million worth of stock at the end of September. It was followed by Biotechnology Value Fund / BVF Inc with a $13.8 million position. Other investors bullish on the company included Ghost Tree Capital, OrbiMed Advisors, and Rock Springs Capital Management. In terms of the portfolio weights assigned to each position Ghost Tree Capital allocated the biggest weight to Mersana Therapeutics, Inc. (NASDAQ:MRSN), around 3.09% of its 13F portfolio. Sarissa Capital Management is also relatively very bullish on the stock, earmarking 2.79 percent of its 13F equity portfolio to MRSN.

With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Acuta Capital Partners, managed by Manfred Yu, established the most valuable position in Mersana Therapeutics, Inc. (NASDAQ:MRSN). Acuta Capital Partners had $4.8 million invested in the company at the end of the quarter. Thomas Bailard’s Bailard Inc also initiated a $0.8 million position during the quarter. The only other fund with a brand new MRSN position is Cliff Asness’s AQR Capital Management.

Let’s now review hedge fund activity in other stocks similar to Mersana Therapeutics, Inc. (NASDAQ:MRSN). These stocks are Aurora Mobile Limited (NASDAQ:JG), IMARA Inc. (NASDAQ:IMRA), Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI), and The Cato Corporation (NYSE:CATO). All of these stocks’ market caps are similar to MRSN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JG 1 114 -1
IMRA 8 87057 8
SPPI 8 8908 -5
CATO 10 18891 -5
Average 6.75 28743 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $29 million. That figure was $83 million in MRSN’s case. The Cato Corporation (NYSE:CATO) is the most popular stock in this table. On the other hand Aurora Mobile Limited (NASDAQ:JG) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Mersana Therapeutics, Inc. (NASDAQ:MRSN) 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 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on MRSN as the stock returned 254.5% since Q1 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.