Is DRRX A Good Stock To Buy Now?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards DURECT Corporation (NASDAQ:DRRX).

Is DRRX a good stock to buy now? DURECT Corporation (NASDAQ:DRRX) was in 8 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 12. DRRX investors should pay attention to an increase in support from the world’s most elite money managers of late. There were 5 hedge funds in our database with DRRX positions at the end of the second quarter. Our calculations also showed that DRRX isn’t among the 30 most popular stocks among hedge funds (click for Q3 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 66 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.

Didric Cederholm Lion Point Capital

Didric Cederholm of Lion Point Capital

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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 5 best cheap stocks to buy according to Ray Dalio to identify stocks with upside potential. 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. With all of this in mind let’s view the recent hedge fund action surrounding DURECT Corporation (NASDAQ:DRRX).

How are hedge funds trading DURECT Corporation (NASDAQ:DRRX)?

At third quarter’s end, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 60% from the second quarter of 2020. On the other hand, there were a total of 9 hedge funds with a bullish position in DRRX a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in DURECT Corporation (NASDAQ:DRRX) was held by Lion Point, which reported holding $30.3 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $9.1 million position. Other investors bullish on the company included Two Sigma Advisors, Arrowstreet Capital, and AQR Capital Management. In terms of the portfolio weights assigned to each position Lion Point allocated the biggest weight to DURECT Corporation (NASDAQ:DRRX), around 6.65% of its 13F portfolio. Algert Global is also relatively very bullish on the stock, designating 0.01 percent of its 13F equity portfolio to DRRX.

Consequently, key money managers were breaking ground themselves. AQR Capital Management, managed by Cliff Asness, established the biggest position in DURECT Corporation (NASDAQ:DRRX). AQR Capital Management had $0.7 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $0.2 million investment in the stock during the quarter. The only other fund with a new position in the stock is Peter Algert’s Algert Global.

Let’s now review hedge fund activity in other stocks similar to DURECT Corporation (NASDAQ:DRRX). We will take a look at AGM Group Holdings Inc. (NASDAQ:AGMH), RISE Education Cayman Ltd (NASDAQ:REDU), Profound Medical Corp. (NASDAQ:PROF), Carrols Restaurant Group, Inc. (NASDAQ:TAST), Ethan Allen Interiors Inc. (NYSE:ETH), Central Puerto S.A. (NYSE:CEPU), and Triumph Group Inc (NYSE:TGI). This group of stocks’ market valuations are closest to DRRX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AGMH 1 186 0
REDU 2 1101 -1
PROF 13 60071 3
TAST 12 34784 0
ETH 15 40292 2
CEPU 2 4910 -2
TGI 13 43185 -1
Average 8.3 26361 0.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.3 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $44 million in DRRX’s case. Ethan Allen Interiors Inc. (NYSE:ETH) is the most popular stock in this table. On the other hand AGM Group Holdings Inc. (NASDAQ:AGMH) is the least popular one with only 1 bullish hedge fund positions. DURECT Corporation (NASDAQ:DRRX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DRRX is 53. 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. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 31.6% in 2020 through December 2nd and surpassed the market again by 16 percentage points. Unfortunately DRRX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DRRX investors were disappointed as the stock returned 7% since the end of September (through 12/2) 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 most of these stocks already outperformed the market in 2020.

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