Hedge Funds Keep Buying Karuna Therapeutics, Inc. (KRTX)

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 Karuna Therapeutics, Inc. (NASDAQ:KRTX).

Is Karuna Therapeutics, Inc. (NASDAQ:KRTX) a buy here? Hedge funds are buying. The number of bullish hedge fund bets rose by 1 lately. Our calculations also showed that KRTX 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). KRTX was in 16 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with KRTX positions at the end of the previous quarter.

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.

Nathan Fischel DAFNA Capital

Nathan Fischel of DAFNA Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology’s influence will go beyond online payments. So, we are checking out this futurist’s moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the fresh hedge fund action encompassing Karuna Therapeutics, Inc. (NASDAQ:KRTX).

What does smart money think about Karuna Therapeutics, Inc. (NASDAQ:KRTX)?

At Q1’s end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards KRTX over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is KRTX A Good Stock To Buy?

The largest stake in Karuna Therapeutics, Inc. (NASDAQ:KRTX) was held by Farallon Capital, which reported holding $40.8 million worth of stock at the end of September. It was followed by Partner Fund Management with a $36 million position. Other investors bullish on the company included Vivo Capital, Rock Springs Capital Management, and Laurion Capital Management. In terms of the portfolio weights assigned to each position Partner Fund Management allocated the biggest weight to Karuna Therapeutics, Inc. (NASDAQ:KRTX), around 2.95% of its 13F portfolio. Acuta Capital Partners is also relatively very bullish on the stock, earmarking 1.95 percent of its 13F equity portfolio to KRTX.

As industrywide interest jumped, some big names were breaking ground themselves. Laurion Capital Management, managed by Benjamin A. Smith, initiated the biggest position in Karuna Therapeutics, Inc. (NASDAQ:KRTX). Laurion Capital Management had $10.6 million invested in the company at the end of the quarter. Manfred Yu’s Acuta Capital Partners also made a $4 million investment in the stock during the quarter. The other funds with new positions in the stock are Julian Baker and Felix Baker’s Baker Bros. Advisors,  Renaissance Technologies, and Nathan Fischel’s DAFNA Capital Management.

Let’s go over hedge fund activity in other stocks similar to Karuna Therapeutics, Inc. (NASDAQ:KRTX). We will take a look at Weingarten Realty Investors (NYSE:WRI), Liberty Latin America Ltd. (NASDAQ:LILAK), Brandywine Realty Trust (NYSE:BDN), and Advanced Energy Industries, Inc. (NASDAQ:AEIS). This group of stocks’ market valuations are closest to KRTX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WRI 20 72034 0
LILAK 25 257107 4
BDN 11 24156 -7
AEIS 14 58741 -6
Average 17.5 103010 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $103 million. That figure was $148 million in KRTX’s case. Liberty Latin America Ltd. (NASDAQ:LILAK) is the most popular stock in this table. On the other hand Brandywine Realty Trust (NYSE:BDN) is the least popular one with only 11 bullish hedge fund positions. Karuna Therapeutics, Inc. (NASDAQ:KRTX) is not the least popular stock in this group but hedge fund interest is still below 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 13.3% in 2020 through June 25th and still beat the market by 16.8 percentage points. A small number of hedge funds were also right about betting on KRTX as the stock returned 62.8% during the second quarter and outperformed the market by an even larger margin.

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