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Is Spero Therapeutics, Inc. (SPRO) Going to Burn These Hedge Funds?

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Spero Therapeutics, Inc. (NASDAQ:SPRO) based on those filings.

Spero Therapeutics, Inc. (NASDAQ:SPRO) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 7 hedge funds’ portfolios at the end of March. At the end of this article we will also compare SPRO to other stocks including U.S. Xpress Enterprises, Inc. (NYSE:USX), Gaia, Inc. (NASDAQ:GAIA), and Nymox Pharmaceutical Corporation (NASDAQ:NYMX) to get a better sense of its popularity.

Video: 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 S&P 500 ETFs by more than 58 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. 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.

Nathan Fischel DAFNA Capital

Nathan Fischel of DAFNA Capital Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the fresh hedge fund action encompassing Spero Therapeutics, Inc. (NASDAQ:SPRO).

How are hedge funds trading Spero Therapeutics, Inc. (NASDAQ:SPRO)?

Heading into the second quarter of 2020, a total of 7 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 SPRO over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Aquilo Capital Management held the most valuable stake in Spero Therapeutics, Inc. (NASDAQ:SPRO), which was worth $14.7 million at the end of the third quarter. On the second spot was Rock Springs Capital Management which amassed $4.9 million worth of shares. Biotechnology Value Fund / BVF Inc, Renaissance Technologies, and DAFNA Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Aquilo Capital Management allocated the biggest weight to Spero Therapeutics, Inc. (NASDAQ:SPRO), around 5.73% of its 13F portfolio. Biotechnology Value Fund / BVF Inc is also relatively very bullish on the stock, earmarking 0.42 percent of its 13F equity portfolio to SPRO.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: OrbiMed Advisors. 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 DAFNA Capital Management).

Let’s also examine hedge fund activity in other stocks similar to Spero Therapeutics, Inc. (NASDAQ:SPRO). We will take a look at U.S. Xpress Enterprises, Inc. (NYSE:USX), Gaia, Inc. (NASDAQ:GAIA), Nymox Pharmaceutical Corporation (NASDAQ:NYMX), and Misonix, Inc. (NASDAQ:MSON). This group of stocks’ market values are closest to SPRO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
USX 7 1063 1
GAIA 11 30002 2
NYMX 5 1340 0
MSON 9 18009 5
Average 8 12604 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $13 million. That figure was $27 million in SPRO’s case. Gaia, Inc. (NASDAQ:GAIA) is the most popular stock in this table. On the other hand Nymox Pharmaceutical Corporation (NASDAQ:NYMX) is the least popular one with only 5 bullish hedge fund positions. Spero Therapeutics, Inc. (NASDAQ:SPRO) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.9% in 2020 through June 10th and still beat the market by 14.2 percentage points. A small number of hedge funds were also right about betting on SPRO as the stock returned 58.4% during the second quarter and outperformed the market by an even larger margin.

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