Hedge Fund Sentiment Is Unchanged On Aileron Therapeutics, Inc. (ALRN)

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Aileron Therapeutics, Inc. (NASDAQ:ALRN).

Aileron Therapeutics, Inc. (NASDAQ:ALRN) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds’ portfolios at the end of September. At the end of this article we will also compare ALRN to other stocks including HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM), Nova Lifestyle, Inc (NASDAQ:NVFY), and VivoPower International PLC (NASDAQ:VVPR) to get a better sense of its popularity.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Nathan Fischel DAFNA Capital

Nathan Fischel of DAFNA Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now let’s check out the recent hedge fund action encompassing Aileron Therapeutics, Inc. (NASDAQ:ALRN).

What does smart money think about Aileron Therapeutics, Inc. (NASDAQ:ALRN)?

At Q3’s end, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ALRN over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Sabby Capital was the largest shareholder of Aileron Therapeutics, Inc. (NASDAQ:ALRN), with a stake worth $0.4 million reported as of the end of September. Trailing Sabby Capital was Renaissance Technologies, which amassed a stake valued at $0.2 million. Pura Vida Investments, DAFNA Capital Management, and Citadel Investment Group 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 Sabby Capital allocated the biggest weight to Aileron Therapeutics, Inc. (NASDAQ:ALRN), around 0.2% of its 13F portfolio. Pura Vida Investments is also relatively very bullish on the stock, dishing out 0.03 percent of its 13F equity portfolio to ALRN.

Because Aileron Therapeutics, Inc. (NASDAQ:ALRN) has witnessed a decline in interest from the smart money, we can see that there lies a certain “tier” of money managers that elected to cut their full holdings last quarter. At the top of the heap, Julian Baker and Felix Baker’s Baker Bros. Advisors cut the largest stake of the 750 funds tracked by Insider Monkey, comprising about $1.5 million in stock. Steven Boyd’s fund, Armistice Capital, also said goodbye to its stock, about $0.9 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Aileron Therapeutics, Inc. (NASDAQ:ALRN) but similarly valued. We will take a look at HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM), Nova Lifestyle, Inc (NASDAQ:NVFY), VivoPower International PLC (NASDAQ:VVPR), and Co-Diagnostics, Inc. (NASDAQ:CODX). This group of stocks’ market valuations resemble ALRN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HTGM 10 4844 4
NVFY 1 20 0
VVPR 1 22 -1
CODX 1 21 0
Average 3.25 1227 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 3.25 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $1 million in ALRN’s case. HTG Molecular Diagnostics, Inc. (NASDAQ:HTGM) is the most popular stock in this table. On the other hand Nova Lifestyle, Inc (NASDAQ:NVFY) is the least popular one with only 1 bullish hedge fund positions. Aileron Therapeutics, Inc. (NASDAQ:ALRN) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ALRN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ALRN were disappointed as the stock returned -28.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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