Hedge Funds Are Crazy About Karuna Therapeutics, Inc. (KRTX)

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the fourth quarter of 2019. A significant number of hedge funds continued their strong performance in 2020 and 2021 as well. We get to see hedge funds’ thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Karuna Therapeutics, Inc. (NASDAQ:KRTX).

Karuna Therapeutics, Inc. (NASDAQ:KRTX) was in 23 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic was previously 17. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. KRTX investors should pay attention to an increase in hedge fund interest lately. There were 17 hedge funds in our database with KRTX positions at the end of the fourth quarter. Our calculations also showed that KRTX isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we’re going to review the recent hedge fund action regarding Karuna Therapeutics, Inc. (NASDAQ:KRTX).

Do Hedge Funds Think KRTX Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 35% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in KRTX a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Farallon Capital has the most valuable position in Karuna Therapeutics, Inc. (NASDAQ:KRTX), worth close to $81.2 million, corresponding to 0.5% of its total 13F portfolio. Coming in second is Andreas Halvorsen of Viking Global, with a $72.3 million position; 0.2% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors with similar optimism comprise Frank Fu’s CaaS Capital, Kris Jenner, Gordon Bussard, Graham McPhail’s Rock Springs Capital Management and Bill Miller’s Miller Value Partners. In terms of the portfolio weights assigned to each position Logos Capital allocated the biggest weight to Karuna Therapeutics, Inc. (NASDAQ:KRTX), around 2.35% of its 13F portfolio. DAFNA Capital Management is also relatively very bullish on the stock, earmarking 1.37 percent of its 13F equity portfolio to KRTX.

As industrywide interest jumped, some big names were breaking ground themselves. CaaS Capital, managed by Frank Fu, created the most valuable position in Karuna Therapeutics, Inc. (NASDAQ:KRTX). CaaS Capital had $45.5 million invested in the company at the end of the quarter. Bill Miller’s Miller Value Partners also initiated a $35 million position during the quarter. The other funds with brand new KRTX positions are Christopher James’s Partner Fund Management, Matthew L Pinz’s Pinz Capital, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s now review hedge fund activity in other stocks similar to Karuna Therapeutics, Inc. (NASDAQ:KRTX). These stocks are Jumia Technologies AG (NYSE:JMIA), Sendas Distribuidora S.A. (NYSE:ASAI), Celsius Holdings, Inc. (NASDAQ:CELH), I-Mab (NASDAQ:IMAB), 8×8, Inc. (NYSE:EGHT), Vishay Intertechnology, Inc. (NYSE:VSH), and EPR Properties (NYSE:EPR). This group of stocks’ market valuations are closest to KRTX’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.3 hedge funds with bullish positions and the average amount invested in these stocks was $383 million. That figure was $396 million in KRTX’s case. Vishay Intertechnology, Inc. (NYSE:VSH) is the most popular stock in this table. On the other hand Sendas Distribuidora S.A. (NYSE:ASAI) is the least popular one with only 6 bullish hedge fund positions. Karuna Therapeutics, Inc. (NASDAQ:KRTX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KRTX is 72.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and beat the market again by 7.7 percentage points. Unfortunately KRTX wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on KRTX were disappointed as the stock returned -7.2% since the end of March (through 7/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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