Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.
Is Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX) a worthy stock to buy now? Prominent investors are getting more bullish. The number of long hedge fund positions improved by 2 recently. Our calculations also showed that cprx isn’t among the 30 most popular stocks among hedge funds. CPRX was in 12 hedge funds’ portfolios at the end of the first quarter of 2019. There were 10 hedge funds in our database with CPRX positions at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let’s view the fresh hedge fund action surrounding Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX).
How are hedge funds trading Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX)?
Heading into the second quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from the previous quarter. On the other hand, there were a total of 15 hedge funds with a bullish position in CPRX a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Consonance Capital Management was the largest shareholder of Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX), with a stake worth $91.2 million reported as of the end of March. Trailing Consonance Capital Management was Broadfin Capital, which amassed a stake valued at $29.9 million. Mangrove Partners, Baker Bros. Advisors, and Opaleye Management were also very fond of the stock, giving the stock large weights in their portfolios.
Now, key money managers were leading the bulls’ herd. Opaleye Management, managed by James A. Silverman, initiated the largest position in Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX). Opaleye Management had $9.3 million invested in the company at the end of the quarter. David Brown’s Hawk Ridge Management also initiated a $3.3 million position during the quarter. The following funds were also among the new CPRX investors: David Harding’s Winton Capital Management and Ken Griffin’s Citadel Investment Group.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX) but similarly valued. These stocks are Matrix Service Co (NASDAQ:MTRX), Heritage Commerce Corp. (NASDAQ:HTBK), First Community Bancshares Inc (NASDAQ:FCBC), and ArQule, Inc. (NASDAQ:ARQL). This group of stocks’ market values are closest to CPRX’s market value.
|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 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $45 million. That figure was $178 million in CPRX’s case. Matrix Service Co (NASDAQ:MTRX) is the most popular stock in this table. On the other hand First Community Bancshares Inc (NASDAQ:FCBC) is the least popular one with only 4 bullish hedge fund positions. Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately CPRX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CPRX were disappointed as the stock returned -26.5% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.