Is CareDx, Inc. (CDNA) A Good Stock To Buy?

With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was CareDx, Inc. (NASDAQ:CDNA).

CareDx, Inc. (NASDAQ:CDNA) was in 22 hedge funds’ portfolios at the end of the third quarter of 2019. CDNA investors should pay attention to a decrease in support from the world’s most elite money managers of late. There were 24 hedge funds in our database with CDNA holdings at the end of the previous quarter. Our calculations also showed that CDNA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the fresh hedge fund action surrounding CareDx, Inc. (NASDAQ:CDNA).

How have hedgies been trading CareDx, Inc. (NASDAQ:CDNA)?

At Q3’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CDNA over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Consonance Capital Management, managed by Mitchell Blutt, holds the largest position in CareDx, Inc. (NASDAQ:CDNA). Consonance Capital Management has a $16.4 million position in the stock, comprising 1.6% of its 13F portfolio. The second largest stake is held by Two Sigma Advisors, managed by John Overdeck and David Siegel, which holds a $13.7 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish comprise David E. Shaw’s D E Shaw, Chuck Royce’s Royce & Associates and Eli Casdin’s Casdin Capital. In terms of the portfolio weights assigned to each position Copernicus Capital Management allocated the biggest weight to CareDx, Inc. (NASDAQ:CDNA), around 3.89% of its 13F portfolio. Consonance Capital Management is also relatively very bullish on the stock, designating 1.62 percent of its 13F equity portfolio to CDNA.

Because CareDx, Inc. (NASDAQ:CDNA) has faced falling interest from the smart money, logic holds that there exists a select few fund managers that elected to cut their full holdings in the third quarter. Intriguingly, Samuel Isaly’s OrbiMed Advisors dropped the largest position of all the hedgies followed by Insider Monkey, worth an estimated $29.8 million in stock. Richard Driehaus’s fund, Driehaus Capital, also cut its stock, about $27.8 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as CareDx, Inc. (NASDAQ:CDNA) but similarly valued. These stocks are Turquoise Hill Resources Ltd (NYSE:TRQ), Big Lots, Inc. (NYSE:BIG), 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS), and Caleres Inc (NYSE:CAL). This group of stocks’ market caps resemble CDNA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TRQ 19 207845 -1
BIG 21 82166 1
FLWS 20 64087 -1
CAL 15 75737 7
Average 18.75 107459 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $107 million. That figure was $105 million in CDNA’s case. Big Lots, Inc. (NYSE:BIG) is the most popular stock in this table. On the other hand Caleres Inc (NYSE:CAL) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks CareDx, Inc. (NASDAQ:CDNA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CDNA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CDNA were disappointed as the stock returned -9.2% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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