Is Cara Therapeutics Inc (CARA) A Good Stock To Buy?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Cara Therapeutics Inc (NASDAQ:CARA) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Cara Therapeutics Inc (NASDAQ:CARA) going to take off soon? The smart money was getting less bullish. The number of bullish hedge fund positions dropped by 7 recently. Our calculations also showed that CARA 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). CARA was in 10 hedge funds’ portfolios at the end of March. There were 17 hedge funds in our database with CARA holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. 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 analyze the fresh hedge fund action regarding Cara Therapeutics Inc (NASDAQ:CARA).

What does smart money think about Cara Therapeutics Inc (NASDAQ:CARA)?

Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -41% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CARA over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

The largest stake in Cara Therapeutics Inc (NASDAQ:CARA) was held by Farallon Capital, which reported holding $30.4 million worth of stock at the end of September. It was followed by Chescapmanager LLC with a $17.2 million position. Other investors bullish on the company included OrbiMed Advisors, Ikarian Capital, and D E Shaw. In terms of the portfolio weights assigned to each position Chescapmanager LLC allocated the biggest weight to Cara Therapeutics Inc (NASDAQ:CARA), around 4.46% of its 13F portfolio. Burrage Capital Management is also relatively very bullish on the stock, dishing out 3.24 percent of its 13F equity portfolio to CARA.

Since Cara Therapeutics Inc (NASDAQ:CARA) has experienced a decline in interest from the smart money, it’s safe to say that there is a sect of fund managers who were dropping their positions entirely heading into Q4. At the top of the heap, Phill Gross and Robert Atchinson’s Adage Capital Management cut the largest investment of all the hedgies monitored by Insider Monkey, comprising an estimated $4.9 million in stock. Steve Cohen’s fund, Point72 Asset Management, also said goodbye to its stock, about $1.3 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 7 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Cara Therapeutics Inc (NASDAQ:CARA) but similarly valued. We will take a look at Simulations Plus, Inc. (NASDAQ:SLP), Intellia Therapeutics, Inc. (NASDAQ:NTLA), Franklin Street Properties Corp. (NYSE:FSP), and National Western Life Group Inc. (NASDAQ:NWLI). This group of stocks’ market valuations are similar to CARA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SLP 10 35925 -2
NTLA 10 24877 -3
FSP 5 30676 -2
NWLI 7 10224 1
Average 8 25426 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $84 million in CARA’s case. Simulations Plus, Inc. (NASDAQ:SLP) is the most popular stock in this table. On the other hand Franklin Street Properties Corp. (NYSE:FSP) is the least popular one with only 5 bullish hedge fund positions. Cara Therapeutics Inc (NASDAQ:CARA) is not the most popular stock in this group but hedge fund interest is still above 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on CARA as the stock returned 29.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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