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How Cempra Inc (CEMP) Stacks Up Against Its Peers?

Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Cempra Inc (NASDAQ:CEMP) has experienced an increase in support from the world’s most successful money managers of late. CEMP was in 15 hedge funds’ portfolios at the end of September. There were 14 hedge funds in our database with CEMP positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Adams Diversified Equity Fund Inc (NYSE:ADX), Headwaters Inc (NYSE:HW), and e.l.f. Beauty Inc (NYSE:ELF) to gather more data points.

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We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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How have hedgies been trading Cempra Inc (NASDAQ:CEMP)?

Heading into the fourth quarter of 2016, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, up by 7% from the previous quarter. By comparison, 12 hedge funds held shares or bullish call options in CEMP heading into this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

HedgeFundSentimentChart

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Palo Alto Investors, led by William Leland Edwards, holds the most valuable position in Cempra Inc (NASDAQ:CEMP). Palo Alto Investors has a $68.8 million position in the stock, comprising 4% of its 13F portfolio. Sitting at the No. 2 spot is Dennis Purcell of Aisling Capital, with a $28.9 million position; the fund has 5.9% of its 13F portfolio invested in the stock. Remaining peers that hold long positions contain John A. Levin’s Levin Capital Strategies, James Dondero’s Highland Capital Management and Hal Mintz’s Sabby Capital. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As one would reasonably expect, key hedge funds have been driving this bullishness. GAMCO Investors, led by Mario Gabelli, initiated the largest position in Cempra Inc (NASDAQ:CEMP). GAMCO Investors had $1.3 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $0.8 million position during the quarter. The following funds were also among the new CEMP investors: Kerr Neilson’s Platinum Asset Management, Behzad Aghazadeh’s venBio Select Advisor, and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.

Let’s check out hedge fund activity in other stocks similar to Cempra Inc (NASDAQ:CEMP). These stocks are Adams Diversified Equity Fund Inc (NYSE:ADX), Headwaters Inc (NYSE:HW), e.l.f. Beauty Inc (NYSE:ELF), and Glaukos Corp (NYSE:GKOS). This group of stocks’ market caps match CEMP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ADX 4 6090 4
HW 23 85313 0
ELF 24 62106 24
GKOS 19 175123 3

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $165 million in CEMP’s case. e.l.f. Beauty Inc (NYSE:ELF) is the most popular stock in this table. On the other hand Adams Diversified Equity Fund Inc (NYSE:ADX) is the least popular one with only 4 bullish hedge fund positions. Cempra Inc (NASDAQ:CEMP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard ELF might be a better candidate to consider taking a long position in.

Disclosure: None