Did Hedge Funds Make The Right Call On Neurocrine Biosciences, Inc. (NBIX)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Neurocrine Biosciences, Inc. (NASDAQ:NBIX) and determine whether hedge funds skillfully traded this stock.

Is Neurocrine Biosciences, Inc. (NASDAQ:NBIX) undervalued? The best stock pickers were turning less bullish. The number of bullish hedge fund positions were cut by 4 lately. Our calculations also showed that NBIX 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. With all of this in mind let’s check out the recent hedge fund action encompassing Neurocrine Biosciences, Inc. (NASDAQ:NBIX).

Hedge fund activity in Neurocrine Biosciences, Inc. (NASDAQ:NBIX)

At Q1’s end, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. By comparison, 35 hedge funds held shares or bullish call options in NBIX 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 significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Joseph Edelman’s Perceptive Advisors has the most valuable position in Neurocrine Biosciences, Inc. (NASDAQ:NBIX), worth close to $265.1 million, corresponding to 6.9% of its total 13F portfolio. The second most bullish fund manager is Healthcor Management LP, managed by Arthur B Cohen and Joseph Healey, which holds a $134 million position; the fund has 5.7% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions encompass Kris Jenner, Gordon Bussard, Graham McPhail’s Rock Springs Capital Management, Julian Baker and Felix Baker’s Baker Bros. Advisors and Samuel Isaly’s OrbiMed Advisors. In terms of the portfolio weights assigned to each position Perceptive Advisors allocated the biggest weight to Neurocrine Biosciences, Inc. (NASDAQ:NBIX), around 6.91% of its 13F portfolio. Healthcor Management LP is also relatively very bullish on the stock, dishing out 5.73 percent of its 13F equity portfolio to NBIX.

Seeing as Neurocrine Biosciences, Inc. (NASDAQ:NBIX) has witnessed falling interest from the smart money, it’s safe to say that there exists a select few money managers who were dropping their positions entirely last quarter. Intriguingly, Xiuping Li’s Opti Capital Management said goodbye to the biggest stake of the “upper crust” of funds watched by Insider Monkey, worth close to $15.4 million in stock. Michael Rockefeller and KarláKroeker’s fund, Woodline Partners, also dumped its stock, about $7.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 4 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Neurocrine Biosciences, Inc. (NASDAQ:NBIX). These stocks are Trimble Inc. (NASDAQ:TRMB), ASE Technology Holding Co., Ltd. (NYSE:ASX), Alleghany Corporation (NYSE:Y), and Pool Corporation (NASDAQ:POOL). This group of stocks’ market values match NBIX’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $417 million. That figure was $1055 million in NBIX’s case. Pool Corporation (NASDAQ:POOL) is the most popular stock in this table. On the other hand ASE Technology Holding Co., Ltd. (NYSE:ASX) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Neurocrine Biosciences, Inc. (NASDAQ:NBIX) 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 NBIX as the stock returned 41% 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.

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