It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Menlo Therapeutics Inc. (NASDAQ:MNLO).
Is Menlo Therapeutics Inc. (NASDAQ:MNLO) a good investment right now? The best stock pickers are in a bearish mood. The number of long hedge fund positions decreased by 1 recently. Our calculations also showed that MNLO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.
Nathan Fischel of DAFNA Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a gander at the new hedge fund action surrounding Menlo Therapeutics Inc. (NASDAQ:MNLO).
How are hedge funds trading Menlo Therapeutics Inc. (NASDAQ:MNLO)?
Heading into the fourth quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MNLO over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Vivo Capital, managed by Albert Cha and Frank Kung, holds the largest position in Menlo Therapeutics Inc. (NASDAQ:MNLO). Vivo Capital has a $18 million position in the stock, comprising 2% of its 13F portfolio. Sitting at the No. 2 spot is Jeffrey Jay and David Kroin of Great Point Partners, with a $7.4 million position; 0.7% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish consist of Nathan Fischel’s DAFNA Capital Management, Nathaniel August’s Mangrove Partners and Julian Baker and Felix Baker’s Baker Bros. Advisors. In terms of the portfolio weights assigned to each position Vivo Capital allocated the biggest weight to Menlo Therapeutics Inc. (NASDAQ:MNLO), around 2.04% of its 13F portfolio. DAFNA Capital Management is also relatively very bullish on the stock, setting aside 1.44 percent of its 13F equity portfolio to MNLO.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: PDT Partners. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified MNLO as a viable investment and initiated a position in the stock.
Let’s check out hedge fund activity in other stocks similar to Menlo Therapeutics Inc. (NASDAQ:MNLO). These stocks are Dean Foods Company (NYSE:DF), UTStarcom Holdings Corp (NASDAQ:UTSI), Mogo Finance Technology Inc. (NASDAQ:MOGO), and SharpSpring, Inc. (NASDAQ:SHSP). This group of stocks’ market caps resemble MNLO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DF | 9 | 1672 | -1 |
| UTSI | 1 | 3451 | -1 |
| MOGO | 2 | 822 | 0 |
| SHSP | 4 | 16631 | -1 |
| Average | 4 | 5644 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $40 million in MNLO’s case. Dean Foods Company (NYSE:DF) is the most popular stock in this table. On the other hand UTStarcom Holdings Corp (NASDAQ:UTSI) is the least popular one with only 1 bullish hedge fund positions. Menlo Therapeutics Inc. (NASDAQ:MNLO) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MNLO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MNLO were disappointed as the stock returned -11.6% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
