Hedge Funds Are Getting Bullish On Castle Biosciences, Inc. (CSTL)

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 Castle Biosciences, Inc. (NASDAQ:CSTL) and determine whether hedge funds skillfully traded this stock.

Castle Biosciences, Inc. (NASDAQ:CSTL) investors should be aware of an increase in support from the world’s most elite money managers lately. Castle Biosciences, Inc. (NASDAQ:CSTL) was in 18 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 12. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 9 hedge funds in our database with CSTL positions at the end of the first quarter. Our calculations also showed that CSTL isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

According to most stock holders, hedge funds are seen as underperforming, old investment vehicles of the past. While there are over 8000 funds in operation today, We look at the aristocrats of this club, about 850 funds. It is estimated that this group of investors administer the majority of all hedge funds’ total asset base, and by shadowing their unrivaled equity investments, Insider Monkey has brought to light various investment strategies that have historically exceeded the broader indices. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Keeping this in mind let’s take a peek at the latest hedge fund action surrounding Castle Biosciences, Inc. (NASDAQ:CSTL).

What does smart money think about Castle Biosciences, Inc. (NASDAQ:CSTL)?

Heading into the third quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 100% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in CSTL a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Highland Capital Management held the most valuable stake in Castle Biosciences, Inc. (NASDAQ:CSTL), which was worth $26.6 million at the end of the third quarter. On the second spot was Driehaus Capital which amassed $16.9 million worth of shares. Millennium Management, Alyeska Investment Group, and Sectoral Asset Management 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 Highland Capital Management allocated the biggest weight to Castle Biosciences, Inc. (NASDAQ:CSTL), around 6.01% of its 13F portfolio. Sectoral Asset Management is also relatively very bullish on the stock, setting aside 0.5 percent of its 13F equity portfolio to CSTL.

As industrywide interest jumped, specific money managers have jumped into Castle Biosciences, Inc. (NASDAQ:CSTL) headfirst. Alyeska Investment Group, managed by Anand Parekh, created the most valuable position in Castle Biosciences, Inc. (NASDAQ:CSTL). Alyeska Investment Group had $5.6 million invested in the company at the end of the quarter. Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management also initiated a $5.4 million position during the quarter. The following funds were also among the new CSTL investors: Ken Griffin’s Citadel Investment Group, Chuck Royce’s Royce & Associates, and Greg Martinez’s Parkman Healthcare Partners.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Castle Biosciences, Inc. (NASDAQ:CSTL) but similarly valued. These stocks are Guess’, Inc. (NYSE:GES), SMART Global Holdings, Inc. (NASDAQ:SGH), Universal Electronics Inc (NASDAQ:UEIC), Gladstone Commercial Corporation (NASDAQ:GOOD), Hyster-Yale Materials Handling Inc (NYSE:HY), Patterson-UTI Energy, Inc. (NASDAQ:PTEN), and CTS Corporation (NYSE:CTS). This group of stocks’ market caps resemble CSTL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GES 18 65488 2
SGH 14 290569 -3
UEIC 11 21122 -2
GOOD 7 60196 -1
HY 11 33128 1
PTEN 26 151270 6
CTS 14 60046 5
Average 14.4 97403 1.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.4 hedge funds with bullish positions and the average amount invested in these stocks was $97 million. That figure was $82 million in CSTL’s case. Patterson-UTI Energy, Inc. (NASDAQ:PTEN) is the most popular stock in this table. On the other hand Gladstone Commercial Corporation (NASDAQ:GOOD) is the least popular one with only 7 bullish hedge fund positions. Castle Biosciences, Inc. (NASDAQ:CSTL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CSTL is 68.9. 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. 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 24.8% in 2020 through the end of third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on CSTL as the stock returned 36.5% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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