Hedge Funds Getting Bullish On Nephros, Inc. (NEPH)

In this article you are going to find out whether hedge funds think Nephros, Inc. (NASDAQ:NEPH) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Nephros, Inc. (NASDAQ:NEPH) has experienced an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that NEPH 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).

Video: 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Charles Davidson - Wexford Capital

Charles Davidson of Wexford Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the key hedge fund action encompassing Nephros, Inc. (NASDAQ:NEPH).

What does smart money think about Nephros, Inc. (NASDAQ:NEPH)?

Heading into the second quarter of 2020, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards NEPH over the last 18 quarters. So, let’s see 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, Charles Davidson and Joseph Jacobs’s Wexford Capital has the largest position in Nephros, Inc. (NASDAQ:NEPH), worth close to $21.4 million, corresponding to 7.9% of its total 13F portfolio. The second largest stake is held by Parkman Healthcare Partners, managed by Greg Martinez, which holds a $1.6 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish contain Israel Englander’s Millennium Management, Alan S. Parsow’s Elkhorn Partners and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital. In terms of the portfolio weights assigned to each position Wexford Capital allocated the biggest weight to Nephros, Inc. (NASDAQ:NEPH), around 7.91% of its 13F portfolio. Parkman Healthcare Partners is also relatively very bullish on the stock, setting aside 0.73 percent of its 13F equity portfolio to NEPH.

Consequently, key hedge funds have been driving this bullishness. Wexford Capital, managed by Charles Davidson and Joseph Jacobs, created the largest position in Nephros, Inc. (NASDAQ:NEPH). Wexford Capital had $21.4 million invested in the company at the end of the quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Nephros, Inc. (NASDAQ:NEPH) but similarly valued. We will take a look at PFSweb, Inc. (NASDAQ:PFSW), ClearPoint Neuro Inc. (NASDAQ:CLPT), Flotek Industries Inc (NYSE:FTK), and Community First Bancshares, Inc. (NASDAQ:CFBI). This group of stocks’ market valuations are similar to NEPH’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PFSW 5 9411 -1
CLPT 3 382 3
FTK 8 8066 -1
CFBI 1 577 0
Average 4.25 4609 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 4.25 hedge funds with bullish positions and the average amount invested in these stocks was $5 million. That figure was $23 million in NEPH’s case. Flotek Industries Inc (NYSE:FTK) is the most popular stock in this table. On the other hand Community First Bancshares, Inc. (NASDAQ:CFBI) is the least popular one with only 1 bullish hedge fund positions. Nephros, Inc. (NASDAQ:NEPH) is not the most popular stock in this group but hedge fund interest is still above average. 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 8.3% in 2020 through the end of May but still beat the market by 13.2 percentage points. Hedge funds were also right about betting on NEPH as the stock returned 23.8% in Q2 (through the end of May) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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