Hedge Funds Never Loved Mersana Therapeutics, Inc. (MRSN) More

In this article you are going to find out whether hedge funds think Mersana Therapeutics, Inc. (NASDAQ:MRSN) 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.

Is Mersana Therapeutics, Inc. (NASDAQ:MRSN) a buy right now? Investors who are in the know are in an optimistic mood. The number of long hedge fund positions rose by 2 lately. Our calculations also showed that MRSN 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). MRSN was in 17 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with MRSN holdings 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.

Alex Denner Sarissa Capital

Alex Denner of Sarissa 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. Keeping this in mind we’re going to take a look at the fresh hedge fund action encompassing Mersana Therapeutics, Inc. (NASDAQ:MRSN).

What does smart money think about Mersana Therapeutics, Inc. (NASDAQ:MRSN)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from one quarter earlier. On the other hand, there were a total of 16 hedge funds with a bullish position in MRSN a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Among these funds, Sarissa Capital Management held the most valuable stake in Mersana Therapeutics, Inc. (NASDAQ:MRSN), which was worth $21.9 million at the end of the third quarter. On the second spot was Biotechnology Value Fund / BVF Inc which amassed $13.8 million worth of shares. Ghost Tree Capital, OrbiMed Advisors, and Rock Springs 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 Ghost Tree Capital allocated the biggest weight to Mersana Therapeutics, Inc. (NASDAQ:MRSN), around 3.09% of its 13F portfolio. Sarissa Capital Management is also relatively very bullish on the stock, dishing out 2.79 percent of its 13F equity portfolio to MRSN.

Now, key hedge funds were breaking ground themselves. Acuta Capital Partners, managed by Manfred Yu, initiated the most valuable position in Mersana Therapeutics, Inc. (NASDAQ:MRSN). Acuta Capital Partners had $4.8 million invested in the company at the end of the quarter. Thomas Bailard’s Bailard Inc also initiated a $0.8 million position during the quarter. The only other fund with a brand new MRSN position is Cliff Asness’s AQR Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Mersana Therapeutics, Inc. (NASDAQ:MRSN). We will take a look at Aurora Mobile Limited (NASDAQ:JG), IMARA Inc. (NASDAQ:IMRA), Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI), and The Cato Corporation (NYSE:CATO). All of these stocks’ market caps are similar to MRSN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JG 1 114 -1
IMRA 8 87057 8
SPPI 8 8908 -5
CATO 10 18891 -5
Average 6.75 28743 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $29 million. That figure was $83 million in MRSN’s case. The Cato Corporation (NYSE:CATO) is the most popular stock in this table. On the other hand Aurora Mobile Limited (NASDAQ:JG) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Mersana Therapeutics, Inc. (NASDAQ:MRSN) is more popular among hedge funds. 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 returned 13.4% in 2020 through June 22nd but still managed to beat the market by 15.9 percentage points. Hedge funds were also right about betting on MRSN as the stock returned 268.8% so far in Q2 (through June 22nd) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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