How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Evolus, Inc. (NASDAQ:EOLS) and determine whether hedge funds had an edge regarding this stock.
Is Evolus, Inc. (NASDAQ:EOLS) a splendid stock to buy now? Prominent investors were in a pessimistic mood. The number of long hedge fund bets retreated by 3 in recent months. Our calculations also showed that EOLS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). EOLS was in 12 hedge funds’ portfolios at the end of the first quarter of 2020. There were 15 hedge funds in our database with EOLS positions at the end of the previous quarter.
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 58 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.
Tim Lynch of Stonepine Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to analyze the new hedge fund action surrounding Evolus, Inc. (NASDAQ:EOLS).
How are hedge funds trading Evolus, Inc. (NASDAQ:EOLS)?
Heading into the second quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in EOLS over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
More specifically, Tang Capital Management was the largest shareholder of Evolus, Inc. (NASDAQ:EOLS), with a stake worth $13.7 million reported as of the end of September. Trailing Tang Capital Management was MFN Partners, which amassed a stake valued at $5.9 million. Stonepine Capital, Sphera Global Healthcare Fund, and Prosight Capital 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 Stonepine Capital allocated the biggest weight to Evolus, Inc. (NASDAQ:EOLS), around 3.61% of its 13F portfolio. Tang Capital Management is also relatively very bullish on the stock, earmarking 1.92 percent of its 13F equity portfolio to EOLS.
Because Evolus, Inc. (NASDAQ:EOLS) has witnessed falling interest from hedge fund managers, logic holds that there exists a select few hedgies that elected to cut their entire stakes heading into Q4. It’s worth mentioning that Oleg Nodelman’s EcoR1 Capital dumped the biggest position of the “upper crust” of funds tracked by Insider Monkey, valued at about $7.3 million in stock. Eric Bannasch’s fund, Cadian Capital, also cut its stock, about $6.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 3 funds heading into Q4.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Evolus, Inc. (NASDAQ:EOLS) but similarly valued. We will take a look at Bank of Commerce Holdings (NASDAQ:BOCH), Investar Holding Corporation (NASDAQ:ISTR), Stratus Properties Inc. (NASDAQ:STRS), and North American Construction Group Ltd. (NYSE:NOA). All of these stocks’ market caps resemble EOLS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BOCH | 5 | 7941 | -2 |
| ISTR | 7 | 14035 | 0 |
| STRS | 2 | 20497 | -1 |
| NOA | 11 | 20183 | 1 |
| Average | 6.25 | 15664 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $31 million in EOLS’s case. North American Construction Group Ltd. (NYSE:NOA) is the most popular stock in this table. On the other hand Stratus Properties Inc. (NASDAQ:STRS) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Evolus, Inc. (NASDAQ:EOLS) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on EOLS as the stock returned 27.7% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
