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Hedge Funds Are Piling Into Kala Pharmaceuticals, Inc. (KALA)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Kala Pharmaceuticals, Inc. (NASDAQ:KALA) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Kala Pharmaceuticals, Inc. (NASDAQ:KALA) a cheap investment right now? Hedge funds were in a bullish mood. The number of long hedge fund bets increased by 1 lately. Kala Pharmaceuticals, Inc. (NASDAQ:KALA) was in 19 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 18. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that KALA 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.

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 56 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.

Samuel Isaly Orbimed Advisors

Samuel Isaly, Founder of OrbiMed Advisors

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 go over the new hedge fund action surrounding Kala Pharmaceuticals, Inc. (NASDAQ:KALA).

How have hedgies been trading Kala Pharmaceuticals, Inc. (NASDAQ:KALA)?

Heading into the third quarter of 2020, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KALA over the last 20 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

More specifically, RA Capital Management was the largest shareholder of Kala Pharmaceuticals, Inc. (NASDAQ:KALA), with a stake worth $114.3 million reported as of the end of September. Trailing RA Capital Management was OrbiMed Advisors, which amassed a stake valued at $56.8 million. Vivo Capital, Opaleye Management, and Millennium 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 RA Capital Management allocated the biggest weight to Kala Pharmaceuticals, Inc. (NASDAQ:KALA), around 2.23% of its 13F portfolio. Samsara BioCapital is also relatively very bullish on the stock, earmarking 1.15 percent of its 13F equity portfolio to KALA.

Now, key hedge funds have been driving this bullishness. Columbus Circle Investors, managed by Principal Global Investors, initiated the most valuable position in Kala Pharmaceuticals, Inc. (NASDAQ:KALA). Columbus Circle Investors had $0.7 million invested in the company at the end of the quarter. Parvinder Thiara’s Athanor Capital also initiated a $0.5 million position during the quarter. The other funds with new positions in the stock are Chen Tianqiao’s Shanda Asset Management, Andre F. Perold’s HighVista Strategies, and Cliff Asness’s AQR Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to Kala Pharmaceuticals, Inc. (NASDAQ:KALA). We will take a look at Cellcom Israel Ltd. (NYSE:CEL), Triumph Bancorp Inc (NASDAQ:TBK), Surgery Partners, Inc. (NASDAQ:SGRY), Orchard Therapeutics plc (NASDAQ:ORTX), Community Trust Bancorp, Inc. (NASDAQ:CTBI), America’s Car-Mart, Inc. (NASDAQ:CRMT), and Amerant Bancorp Inc. (NASDAQ:AMTB). All of these stocks’ market caps are similar to KALA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CEL 2 17576 1
TBK 7 24154 1
SGRY 14 73891 4
ORTX 20 150290 1
CTBI 8 14116 2
CRMT 14 67937 4
AMTB 2 5339 0
Average 9.6 50472 1.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.6 hedge funds with bullish positions and the average amount invested in these stocks was $50 million. That figure was $200 million in KALA’s case. Orchard Therapeutics plc (NASDAQ:ORTX) is the most popular stock in this table. On the other hand Cellcom Israel Ltd. (NYSE:CEL) is the least popular one with only 2 bullish hedge fund positions. Kala Pharmaceuticals, Inc. (NASDAQ:KALA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KALA is 83.2. 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 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 September and beat the market by 19.3 percentage points. Unfortunately KALA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KALA were disappointed as the stock returned -28.6% in Q3 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 many of these stocks already outperformed the market so far this year.

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