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Did Hedge Funds Make The Right Call On Zogenix, Inc. (ZGNX) ?

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 Zogenix, Inc. (NASDAQ:ZGNX) and determine whether hedge funds had an edge regarding this stock.

Zogenix, Inc. (NASDAQ:ZGNX) shareholders have witnessed an increase in support from the world’s most elite money managers in recent months. ZGNX was in 36 hedge funds’ portfolios at the end of March. There were 33 hedge funds in our database with ZGNX holdings at the end of the previous quarter. Our calculations also showed that ZGNX 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.

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.

Broadfin Kevin Kotler

Kevin Kotler of Broadfin 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. With all of this in mind let’s check out the recent hedge fund action encompassing Zogenix, Inc. (NASDAQ:ZGNX).

What have hedge funds been doing with Zogenix, Inc. (NASDAQ:ZGNX)?

At the end of the first quarter, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the fourth quarter of 2019. By comparison, 37 hedge funds held shares or bullish call options in ZGNX a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is ZGNX A Good Stock To Buy?

The largest stake in Zogenix, Inc. (NASDAQ:ZGNX) was held by RA Capital Management, which reported holding $130.5 million worth of stock at the end of September. It was followed by Perceptive Advisors with a $85.4 million position. Other investors bullish on the company included Avoro Capital Advisors (venBio Select Advisor), Farallon Capital, and Eversept Partners. In terms of the portfolio weights assigned to each position Eversept Partners allocated the biggest weight to Zogenix, Inc. (NASDAQ:ZGNX), around 12.6% of its 13F portfolio. Pinz Capital is also relatively very bullish on the stock, earmarking 6.4 percent of its 13F equity portfolio to ZGNX.

Now, some big names have been driving this bullishness. Ikarian Capital, managed by Neil Shahrestani, created the most valuable position in Zogenix, Inc. (NASDAQ:ZGNX). Ikarian Capital had $13.6 million invested in the company at the end of the quarter. Lawrence Hawkins’s Prosight Capital also made a $4 million investment in the stock during the quarter. The following funds were also among the new ZGNX investors: Ken Greenberg and David Kim’s Ghost Tree Capital, Thomas Bailard’s Bailard Inc, and Matthew L Pinz’s Pinz Capital.

Let’s go over hedge fund activity in other stocks similar to Zogenix, Inc. (NASDAQ:ZGNX). We will take a look at AMC Networks Inc (NASDAQ:AMCX), Mueller Industries, Inc. (NYSE:MLI), Corcept Therapeutics Incorporated (NASDAQ:CORT), and Hilton Grand Vacations Inc. (NYSE:HGV). This group of stocks’ market valuations are similar to ZGNX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMCX 23 112696 -2
MLI 17 160955 -4
CORT 21 160165 0
HGV 29 512572 -17
Average 22.5 236597 -5.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $237 million. That figure was $579 million in ZGNX’s case. Hilton Grand Vacations Inc. (NYSE:HGV) is the most popular stock in this table. On the other hand Mueller Industries, Inc. (NYSE:MLI) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Zogenix, Inc. (NASDAQ:ZGNX) 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately ZGNX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ZGNX were disappointed as the stock returned 9.2% 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.