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Did Hedge Funds Make The Right Call On Reata Pharmaceuticals, Inc. (RETA) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Reata Pharmaceuticals, Inc. (NASDAQ:RETA) and determine whether the smart money was really smart about this stock.

Is Reata Pharmaceuticals, Inc. (NASDAQ:RETA) a bargain? Money managers were getting more optimistic. The number of bullish hedge fund bets inched up by 4 recently. Our calculations also showed that RETA 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). RETA was in 33 hedge funds’ portfolios at the end of the first quarter of 2020. There were 29 hedge funds in our database with RETA positions at the end of the previous quarter.

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.

Stan Druckenmiller DUQUESNE CAPITAL

Stanley Druckenmiller of Duquesne Capital

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. Keeping this in mind let’s go over the recent hedge fund action surrounding Reata Pharmaceuticals, Inc. (NASDAQ:RETA).

How have hedgies been trading Reata Pharmaceuticals, Inc. (NASDAQ:RETA)?

At the end of the first quarter, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the fourth quarter of 2019. By comparison, 18 hedge funds held shares or bullish call options in RETA a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, Duquesne Capital was the largest shareholder of Reata Pharmaceuticals, Inc. (NASDAQ:RETA), with a stake worth $76.8 million reported as of the end of September. Trailing Duquesne Capital was Cormorant Asset Management, which amassed a stake valued at $70.3 million. Cormorant Asset Management, Millennium Management, and Corriente Advisors 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 Corriente Advisors allocated the biggest weight to Reata Pharmaceuticals, Inc. (NASDAQ:RETA), around 29.6% of its 13F portfolio. Prosight Capital is also relatively very bullish on the stock, earmarking 5.06 percent of its 13F equity portfolio to RETA.

As aggregate interest increased, some big names have jumped into Reata Pharmaceuticals, Inc. (NASDAQ:RETA) headfirst. Partner Fund Management, managed by Christopher James, established the largest position in Reata Pharmaceuticals, Inc. (NASDAQ:RETA). Partner Fund Management had $14.1 million invested in the company at the end of the quarter. Manfred Yu’s Acuta Capital Partners also made a $3.4 million investment in the stock during the quarter. The following funds were also among the new RETA investors: Jody LaNasa’s Serengeti Asset Management, Greg Eisner’s Engineers Gate Manager, and John Overdeck and David Siegel’s Two Sigma Advisors.

Let’s now take a look at hedge fund activity in other stocks similar to Reata Pharmaceuticals, Inc. (NASDAQ:RETA). These stocks are People’s United Financial, Inc. (NASDAQ:PBCT), Steel Dynamics, Inc. (NASDAQ:STLD), First American Financial Corp (NYSE:FAF), and PG&E Corporation (NYSE:PCG). This group of stocks’ market caps match RETA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PBCT 22 43269 0
STLD 27 330665 -8
FAF 40 525520 -2
PCG 48 1984927 -2
Average 34.25 721095 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $721 million. That figure was $398 million in RETA’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand People’s United Financial, Inc. (NASDAQ:PBCT) is the least popular one with only 22 bullish hedge fund positions. Reata Pharmaceuticals, Inc. (NASDAQ:RETA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 and surpassed the market by 15.5 percentage points. Unfortunately RETA wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RETA investors were disappointed as the stock returned 8.1% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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