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Is FibroGen Inc (FGEN) Going To Burn These Hedge Funds ?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like FibroGen Inc (NASDAQ:FGEN).

Is FibroGen Inc (NASDAQ:FGEN) going to take off soon? The smart money is taking a pessimistic view. The number of long hedge fund positions went down by 5 lately. Our calculations also showed that FGEN isn’t among the 30 most popular stocks among hedge funds (view the video below). FGEN was in 16 hedge funds’ portfolios at the end of the second quarter of 2019. There were 21 hedge funds in our database with FGEN positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

FGEN_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to review the key hedge fund action encompassing FibroGen Inc (NASDAQ:FGEN).

How have hedgies been trading FibroGen Inc (NASDAQ:FGEN)?

At Q2’s end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from the first quarter of 2019. By comparison, 17 hedge funds held shares or bullish call options in FGEN a year ago. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Oleg Nodelman EcoR1 Capital

The largest stake in FibroGen Inc (NASDAQ:FGEN) was held by Adage Capital Management, which reported holding $76.8 million worth of stock at the end of March. It was followed by Farallon Capital with a $76.8 million position. Other investors bullish on the company included EcoR1 Capital, Citadel Investment Group, and GLG Partners.

Due to the fact that FibroGen Inc (NASDAQ:FGEN) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of hedgies who were dropping their full holdings heading into Q3. It’s worth mentioning that Oleg Nodelman’s EcoR1 Capital dumped the biggest investment of the 750 funds followed by Insider Monkey, totaling about $24 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund sold off about $9.1 million worth. These moves are interesting, as total hedge fund interest fell by 5 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to FibroGen Inc (NASDAQ:FGEN). We will take a look at LHC Group, Inc. (NASDAQ:LHCG), Graham Holdings Co (NYSE:GHC), Valvoline Inc. (NYSE:VVV), and Enstar Group Ltd. (NASDAQ:ESGR). This group of stocks’ market caps match FGEN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LHCG 26 108059 3
GHC 15 562705 0
VVV 22 229753 3
ESGR 10 302329 -1
Average 18.25 300712 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $301 million. That figure was $317 million in FGEN’s case. LHC Group, Inc. (NASDAQ:LHCG) is the most popular stock in this table. On the other hand Enstar Group Ltd. (NASDAQ:ESGR) is the least popular one with only 10 bullish hedge fund positions. FibroGen Inc (NASDAQ:FGEN) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately FGEN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FGEN investors were disappointed as the stock returned -18.1% during the third 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 many of these stocks already outperformed the market so far in 2019.

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

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