Hedge Funds Have Never Been This Bullish On Kala Pharmaceuticals, Inc. (KALA)

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Kala Pharmaceuticals, Inc. (NASDAQ:KALA).

Is Kala Pharmaceuticals, Inc. (NASDAQ:KALA) a healthy stock for your portfolio? Prominent investors are taking an optimistic view. The number of long hedge fund positions improved by 8 lately. Our calculations also showed that KALA 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). KALA was in 18 hedge funds’ portfolios at the end of March. There were 10 hedge funds in our database with KALA positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Peter Kolchinsky of RA 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. 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. With all of this in mind we’re going to take a peek at the key hedge fund action regarding Kala Pharmaceuticals, Inc. (NASDAQ:KALA).

Hedge fund activity in Kala Pharmaceuticals, Inc. (NASDAQ:KALA)

At Q1’s end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 80% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KALA over the last 18 quarters. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

The largest stake in Kala Pharmaceuticals, Inc. (NASDAQ:KALA) was held by RA Capital Management, which reported holding $95.6 million worth of stock at the end of September. It was followed by OrbiMed Advisors with a $47.5 million position. Other investors bullish on the company included Millennium Management, Opaleye Management, and Vivo Capital. In terms of the portfolio weights assigned to each position RA Capital Management allocated the biggest weight to Kala Pharmaceuticals, Inc. (NASDAQ:KALA), around 3.02% of its 13F portfolio. Opaleye Management is also relatively very bullish on the stock, earmarking 1.92 percent of its 13F equity portfolio to KALA.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into Kala Pharmaceuticals, Inc. (NASDAQ:KALA) headfirst. Opaleye Management, managed by James A. Silverman, created the most valuable position in Kala Pharmaceuticals, Inc. (NASDAQ:KALA). Opaleye Management had $7.2 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also initiated a $4.4 million position during the quarter. The following funds were also among the new KALA investors: Greg Martinez’s Parkman Healthcare Partners, Renaissance Technologies, and Srini Akkaraju and Michael Dybbs’s Samsara BioCapital.

Let’s check out hedge fund activity in other stocks similar to Kala Pharmaceuticals, Inc. (NASDAQ:KALA). These stocks are Bain Capital Specialty Finance, Inc. (NYSE:BCSF), Hawaiian Holdings, Inc. (NASDAQ:HA), Univest Financial Corporation (NASDAQ:UVSP), and iHeartMedia, Inc. (NASDAQ:IHRT). All of these stocks’ market caps resemble KALA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BCSF 8 13111 0
HA 19 45639 4
UVSP 11 55114 -2
IHRT 28 106885 -3
Average 16.5 55187 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $55 million. That figure was $183 million in KALA’s case. iHeartMedia, Inc. (NASDAQ:IHRT) is the most popular stock in this table. On the other hand Bain Capital Specialty Finance, Inc. (NYSE:BCSF) is the least popular one with only 8 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 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 13.4% in 2020 through June 22nd but still beat the market by 15.9 percentage points. Hedge funds were also right about betting on KALA as the stock returned 42.5% in Q2 (through June 22nd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Follow Kala Pharmaceuticals Inc. (NASDAQ:KALA)

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