Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same 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 is wise to check hedge fund activity before you invest your time or your savings on a stock like Gritstone Oncology, Inc. (NASDAQ:GRTS).
Gritstone Oncology, Inc. (NASDAQ:GRTS) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds’ portfolios at the end of the third quarter of 2019. 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 Braemar Hotels & Resorts Inc. (NYSE:BHR), Castle Biosciences, Inc. (NASDAQ:CSTL), and Green Plains Partners LP (NASDAQ:GPP) to gather more data points. Our calculations also showed that GRTS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Paul Marshall of Marshall Wace
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s review the latest hedge fund action encompassing Gritstone Oncology, Inc. (NASDAQ:GRTS).
How have hedgies been trading Gritstone Oncology, Inc. (NASDAQ:GRTS)?
At the end of the third quarter, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GRTS over the last 17 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
The largest stake in Gritstone Oncology, Inc. (NASDAQ:GRTS) was held by Redmile Group, which reported holding $26.8 million worth of stock at the end of September. It was followed by Casdin Capital with a $19.7 million position. Other investors bullish on the company included Frazier Healthcare Partners, Marshall Wace, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Frazier Healthcare Partners allocated the biggest weight to Gritstone Oncology, Inc. (NASDAQ:GRTS), around 5.57% of its 13F portfolio. Casdin Capital is also relatively very bullish on the stock, earmarking 1.97 percent of its 13F equity portfolio to GRTS.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Endurant Capital Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Millennium Management).
Let’s also examine hedge fund activity in other stocks similar to Gritstone Oncology, Inc. (NASDAQ:GRTS). We will take a look at Braemar Hotels & Resorts Inc. (NYSE:BHR), Castle Biosciences, Inc. (NASDAQ:CSTL), Green Plains Partners LP (NASDAQ:GPP), and Empresa Distribuidora y Comercializadora Norte Sociedad Anonima (NYSE:EDN). This group of stocks’ market caps match GRTS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BHR | 13 | 55948 | -2 |
| CSTL | 12 | 38901 | 12 |
| GPP | 2 | 3131 | 0 |
| EDN | 3 | 1990 | -1 |
| Average | 7.5 | 24993 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $67 million in GRTS’s case. Braemar Hotels & Resorts Inc. (NYSE:BHR) is the most popular stock in this table. On the other hand Green Plains Partners LP (NASDAQ:GPP) is the least popular one with only 2 bullish hedge fund positions. Gritstone Oncology, Inc. (NASDAQ:GRTS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately GRTS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on GRTS were disappointed as the stock returned 0.8% during the fourth quarter (through the end of November) 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 this year.
Disclosure: None. This article was originally published at Insider Monkey.
