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 Aerie Pharmaceuticals Inc (NASDAQ:AERI) and determine whether hedge funds had an edge regarding this stock.
Aerie Pharmaceuticals Inc (NASDAQ:AERI) investors should pay attention to a decrease in hedge fund interest recently. Aerie Pharmaceuticals Inc (NASDAQ:AERI) was in 23 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 31. Our calculations also showed that AERI 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.
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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. 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. Keeping this in mind let’s analyze the recent hedge fund action encompassing Aerie Pharmaceuticals Inc (NASDAQ:AERI).
How have hedgies been trading Aerie Pharmaceuticals Inc (NASDAQ:AERI)?
At Q2’s end, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in AERI over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Partner Fund Management, managed by Christopher James, holds the most valuable position in Aerie Pharmaceuticals Inc (NASDAQ:AERI). Partner Fund Management has a $33.6 million position in the stock, comprising 1.7% of its 13F portfolio. Sitting at the No. 2 spot is Levin Capital Strategies, led by John A. Levin, holding a $25.8 million position; the fund has 3.6% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish encompass Ken Griffin’s Citadel Investment Group, Mark Kingdon’s Kingdon Capital and Steve Cohen’s Point72 Asset Management. In terms of the portfolio weights assigned to each position Levin Capital Strategies allocated the biggest weight to Aerie Pharmaceuticals Inc (NASDAQ:AERI), around 3.57% of its 13F portfolio. Partner Fund Management is also relatively very bullish on the stock, dishing out 1.74 percent of its 13F equity portfolio to AERI.
Seeing as Aerie Pharmaceuticals Inc (NASDAQ:AERI) has witnessed falling interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of funds that elected to cut their positions entirely last quarter. At the top of the heap, Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management said goodbye to the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising about $6.1 million in stock, and Jim Tananbaum’s Foresite Capital was right behind this move, as the fund dumped about $4.8 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 1 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Aerie Pharmaceuticals Inc (NASDAQ:AERI). We will take a look at Kearny Financial Corp. (NASDAQ:KRNY), Republic Bancorp, Inc. KY (NASDAQ:RBCAA), Five Point Holdings, LLC (NYSE:FPH), Ebix Inc (NASDAQ:EBIX), Antero Resources Corp (NYSE:AR), Relmada Therapeutics, Inc. (NASDAQ:RLMD), and Vocera Communications Inc (NYSE:VCRA). This group of stocks’ market caps are similar to AERI’s market cap.
|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 14.9 hedge funds with bullish positions and the average amount invested in these stocks was $103 million. That figure was $158 million in AERI’s case. Kearny Financial Corp. (NASDAQ:KRNY) is the most popular stock in this table. On the other hand Republic Bancorp, Inc. KY (NASDAQ:RBCAA) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Aerie Pharmaceuticals Inc (NASDAQ:AERI) is more popular among hedge funds. Our overall hedge fund sentiment score for AERI is 76.3. 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 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. Unfortunately AERI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AERI were disappointed as the stock returned -20.3% during the third 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.
Disclosure: None. This article was originally published at Insider Monkey.