Hedge Funds Are Piling Back Into Zogenix, Inc. (ZGNX): Should You Follow?

Looking for high-potential stocks? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 7.6% in the 12 months ending November 21, with more than 51% of the stocks in the index failing to beat the benchmark. Therefore, the odds that one will pin down a winner by randomly picking a stock are less than the odds in a fair coin-tossing game. Conversely, best performing hedge funds’ 30 preferred mid-cap stocks generated a return of 18% during the same 12-month period. Coincidence? It might happen to be so, but it is unlikely. Our research covering a 17-year period indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Zogenix, Inc. (NASDAQ:ZGNX) .

Zogenix, Inc. (NASDAQ:ZGNX) has seen an increase in activity from the world’s largest hedge funds recently. 18 hedge funds owned the stock on September 30. There were just 13 hedge funds in our database with ZGNX positions at the end of the June quarter. At the end of this article we will also compare ZGNX to other stocks including ChemoCentryx Inc (NASDAQ:CCXI), Guidance Software, Inc. (NASDAQ:GUID), and Home Bancorp, Inc. (NASDAQ:HBCP) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

How have hedgies been trading Zogenix, Inc. (NASDAQ:ZGNX)?

At Q3’s end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a 38% jump from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in ZGNX heading into this year, so hedge fund ownership is still down slightly during that time. 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 stakes significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, RA Capital Management, led by Peter Kolchinsky, holds the biggest position in Zogenix, Inc. (NASDAQ:ZGNX). RA Capital Management has a $31.5 million position in the stock, comprising 3.2% of its 13F portfolio. Coming in second is Great Point Partners, led by Jeffrey Jay and David Kroin, which holds a $27.9 million position; the fund has 7.1% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that hold long positions comprise Julian Baker and Felix Baker’s Baker Bros. Advisors, Kevin Kotler’s Broadfin Capital, and Ken Greenberg and David Kim’s Ghost Tree Capital. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

With general bullishness amongst the heavyweights, key hedge funds have been driving this positive sentiment. Ghost Tree Capital initiated the biggest position in Zogenix, Inc. (NASDAQ:ZGNX). Ghost Tree Capital had $3.7 million invested in the company at the end of the quarter. Ori Hershkovitz’s Nexthera Capital also initiated a $3 million position during the quarter. The following funds were also among the new ZGNX investors: Thomas Bailard’s Bailard Inc, Vishal Bhutani and Joshua Bederman’s Pyrrho Capital Management, and Joseph Edelman’s Perceptive Advisors.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Zogenix, Inc. (NASDAQ:ZGNX) but similarly valued. These stocks are ChemoCentryx Inc (NASDAQ:CCXI), Guidance Software, Inc. (NASDAQ:GUID), Home Bancorp, Inc. (NASDAQ:HBCP), and New America High Income Fund Inc. (NYSE:HYB). This group of stocks’ market caps are closest to ZGNX’s market cap.

As you can see these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $102 million in ZGNX’s case. ChemoCentryx Inc (NASDAQ:CCXI) is the most popular stock in this table. On the other hand New America High Income Fund Inc. (NYSE:HYB) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Zogenix, Inc. (NASDAQ:ZGNX) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

Disclosure: None