Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 817 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Kezar Life Sciences, Inc. (NASDAQ:KZR).
Is KZR a good stock to buy now? Investors who are in the know were reducing their bets on the stock. The number of long hedge fund positions shrunk by 1 in recent months. Kezar Life Sciences, Inc. (NASDAQ:KZR) was in 13 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 14. Our calculations also showed that KZR 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.
If you’d ask most traders, hedge funds are assumed to be worthless, outdated investment vehicles of yesteryear. While there are over 8000 funds in operation at the moment, We choose to focus on the top tier of this group, around 850 funds. These money managers preside over the majority of the hedge fund industry’s total asset base, and by tailing their highest performing stock picks, Insider Monkey has determined a number of investment strategies that have historically exceeded the market. Insider Monkey’s flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 13% since February 2017 (through November 17th) even though the market was up 65% during the same period. We just shared a list of 6 short targets in our latest quarterly update .
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 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 take a glance at the recent hedge fund action regarding Kezar Life Sciences, Inc. (NASDAQ:KZR).
Do Hedge Funds Think KZR Is A Good Stock To Buy Now?
At Q3’s end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the second quarter of 2020. On the other hand, there were a total of 8 hedge funds with a bullish position in KZR a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Cormorant Asset Management, managed by Bihua Chen, holds the most valuable position in Kezar Life Sciences, Inc. (NASDAQ:KZR). Cormorant Asset Management has a $4.5 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is Opaleye Management, led by James A. Silverman, holding a $3.3 million position; 0.6% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors with similar optimism consist of Israel Englander’s Millennium Management, Anand Parekh’s Alyeska Investment Group and Julian Baker and Felix Baker’s Baker Bros. Advisors. In terms of the portfolio weights assigned to each position Prosight Capital allocated the biggest weight to Kezar Life Sciences, Inc. (NASDAQ:KZR), around 0.84% of its 13F portfolio. Opaleye Management is also relatively very bullish on the stock, dishing out 0.64 percent of its 13F equity portfolio to KZR.
Judging by the fact that Kezar Life Sciences, Inc. (NASDAQ:KZR) has witnessed a decline in interest from hedge fund managers, it’s easy to see that there is a sect of fund managers that decided to sell off their positions entirely in the third quarter. At the top of the heap, Jonathan Barrett and Paul Segal’s Luminus Management cut the biggest stake of all the hedgies followed by Insider Monkey, worth an estimated $1.3 million in stock, and Richard Driehaus’s Driehaus Capital was right behind this move, as the fund dumped about $0.9 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 1 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Kezar Life Sciences, Inc. (NASDAQ:KZR). These stocks are RBB Bancorp (NASDAQ:RBB), Cooper-Standard Holdings Inc (NYSE:CPS), Westport Fuel Systems Inc. (NASDAQ:WPRT), Macatawa Bank Corporation (NASDAQ:MCBC), Park Aerospace Corp. (NYSE:PKE), Entercom Communications Corp. (NYSE:ETM), and Natural Grocers by Vitamin Cottage Inc (NYSE:NGVC). This group of stocks’ market values resemble KZR’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 10.9 hedge funds with bullish positions and the average amount invested in these stocks was $20 million. That figure was $27 million in KZR’s case. Entercom Communications Corp. (NYSE:ETM) is the most popular stock in this table. On the other hand RBB Bancorp (NASDAQ:RBB) is the least popular one with only 6 bullish hedge fund positions. Kezar Life Sciences, Inc. (NASDAQ:KZR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KZR is 63.7. 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. 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 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Hedge funds were also right about betting on KZR as the stock returned 19.8% since the end of Q3 (through 12/8) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.