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 Retrophin Inc (NASDAQ:RTRX) and determine whether hedge funds had an edge regarding this stock.
Is Retrophin Inc (NASDAQ:RTRX) a great stock to buy now? Hedge funds were getting more bullish. The number of long hedge fund positions improved by 4 recently. Retrophin Inc (NASDAQ:RTRX) was in 26 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 23. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that RTRX isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
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 56 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to check out the new hedge fund action regarding Retrophin Inc (NASDAQ:RTRX).
How have hedgies been trading Retrophin Inc (NASDAQ:RTRX)?
At Q2’s end, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 18% from the first quarter of 2020. On the other hand, there were a total of 19 hedge funds with a bullish position in RTRX a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, RA Capital Management was the largest shareholder of Retrophin Inc (NASDAQ:RTRX), with a stake worth $94.6 million reported as of the end of September. Trailing RA Capital Management was Renaissance Technologies, which amassed a stake valued at $40.4 million. Scopia Capital, D E Shaw, and Adage Capital Management 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 Scopia Capital allocated the biggest weight to Retrophin Inc (NASDAQ:RTRX), around 4.01% of its 13F portfolio. RA Capital Management is also relatively very bullish on the stock, designating 1.84 percent of its 13F equity portfolio to RTRX.
Now, specific money managers have jumped into Retrophin Inc (NASDAQ:RTRX) headfirst. Avoro Capital Advisors (venBio Select Advisor), managed by Behzad Aghazadeh, established the most valuable position in Retrophin Inc (NASDAQ:RTRX). Avoro Capital Advisors (venBio Select Advisor) had $21.4 million invested in the company at the end of the quarter. Doron Breen and Mori Arkin’s Sphera Global Healthcare Fund also initiated a $5.1 million position during the quarter. The following funds were also among the new RTRX investors: Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Matthew L Pinz’s Pinz Capital.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Retrophin Inc (NASDAQ:RTRX) but similarly valued. These stocks are Limelight Networks, Inc. (NASDAQ:LLNW), GreenSky, Inc. (NASDAQ:GSKY), PAE Incorporated (NASDAQ:PAE), Upland Software Inc (NASDAQ:UPLD), Vapotherm, Inc. (NYSE:VAPO), Nexa Resources S.A. (NYSE:NEXA), and Griffon Corporation (NYSE:GFF). This group of stocks’ market valuations are similar to RTRX’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.4 hedge funds with bullish positions and the average amount invested in these stocks was $115 million. That figure was $380 million in RTRX’s case. Limelight Networks, Inc. (NASDAQ:LLNW) is the most popular stock in this table. On the other hand Nexa Resources S.A. (NYSE:NEXA) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Retrophin Inc (NASDAQ:RTRX) is more popular among hedge funds. Our overall hedge fund sentiment score for RTRX is 89. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. Unfortunately RTRX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RTRX were disappointed as the stock returned -10.4% since the end of the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.