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Hedge Funds Cashed Out Of Heron Therapeutics Inc (HRTX) Too Early

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year’s Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Heron Therapeutics Inc (NASDAQ:HRTX) changed recently.

Heron Therapeutics Inc (NASDAQ:HRTX) has seen a decrease in support from the world’s most elite money managers recently. HRTX was in 15 hedge funds’ portfolios at the end of September. There were 18 hedge funds in our database with HRTX positions at the end of the previous quarter. Our calculations also showed that HRTX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Felix Baker - Baker Bros.

Felix Baker of Baker Bros.

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 recent hedge fund action surrounding Heron Therapeutics Inc (NASDAQ:HRTX).

How are hedge funds trading Heron Therapeutics Inc (NASDAQ:HRTX)?

At Q3’s end, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HRTX over the last 17 quarters. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Is HRTX A Good Stock To Buy?

More specifically, Baker Bros. Advisors was the largest shareholder of Heron Therapeutics Inc (NASDAQ:HRTX), with a stake worth $111.3 million reported as of the end of September. Trailing Baker Bros. Advisors was Tang Capital Management, which amassed a stake valued at $102 million. Bridger Management, Citadel Investment Group, and D E Shaw 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 Tang Capital Management allocated the biggest weight to Heron Therapeutics Inc (NASDAQ:HRTX), around 17.45% of its 13F portfolio. Bridger Management is also relatively very bullish on the stock, setting aside 3.71 percent of its 13F equity portfolio to HRTX.

Since Heron Therapeutics Inc (NASDAQ:HRTX) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few fund managers that elected to cut their positions entirely last quarter. Intriguingly, Gilchrist Berg’s Water Street Capital dropped the biggest investment of all the hedgies monitored by Insider Monkey, worth an estimated $7.6 million in stock. Renaissance Technologies, also sold off its stock, about $1.8 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Heron Therapeutics Inc (NASDAQ:HRTX). These stocks are Gibraltar Industries Inc (NASDAQ:ROCK), Denali Therapeutics Inc. (NASDAQ:DNLI), FBL Financial Group (NYSE:FFG), and TPG RE Finance Trust, Inc. (NYSE:TRTX). This group of stocks’ market values are similar to HRTX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ROCK 18 118518 8
DNLI 7 14082 -2
FFG 8 16754 1
TRTX 10 45884 1
Average 10.75 48810 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $49 million. That figure was $373 million in HRTX’s case. Gibraltar Industries Inc (NASDAQ:ROCK) is the most popular stock in this table. On the other hand Denali Therapeutics Inc. (NASDAQ:DNLI) is the least popular one with only 7 bullish hedge fund positions. Heron Therapeutics Inc (NASDAQ:HRTX) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on HRTX as the stock returned 38.2% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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