Should I Avoid Constellation Pharmaceuticals, Inc. (CNST)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Melvin Capital’s recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Constellation Pharmaceuticals, Inc. (NASDAQ:CNST).

Is Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) going to take off soon? Prominent investors were becoming less hopeful. The number of long hedge fund positions fell by 9 in recent months. Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) was in 26 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 35. Our calculations also showed that CNST isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.

Peter Kolchinsky of RA Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, economists warn of inflation flare up. So, we are checking out this backdoor gold play that has hit peak gains of 718% in a little over a year. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we’re going to review the fresh hedge fund action regarding Constellation Pharmaceuticals, Inc. (NASDAQ:CNST).

Do Hedge Funds Think CNST Is A Good Stock To Buy Now?

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the fourth quarter of 2020. By comparison, 25 hedge funds held shares or bullish call options in CNST 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.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Avoro Capital Advisors (venBio Select Advisor), managed by Behzad Aghazadeh, holds the largest position in Constellation Pharmaceuticals, Inc. (NASDAQ:CNST). Avoro Capital Advisors (venBio Select Advisor) has a $69 million position in the stock, comprising 1.2% of its 13F portfolio. The second largest stake is held by Peter Kolchinsky of RA Capital Management, with a $52.4 million position; 0.8% of its 13F portfolio is allocated to the stock. Some other professional money managers that are bullish encompass Eli Casdin’s Casdin Capital, James E. Flynn’s Deerfield Management and Farallon Capital. In terms of the portfolio weights assigned to each position Euclidean Capital allocated the biggest weight to Constellation Pharmaceuticals, Inc. (NASDAQ:CNST), around 4.34% of its 13F portfolio. Great Point Partners is also relatively very bullish on the stock, setting aside 4.22 percent of its 13F equity portfolio to CNST.

Judging by the fact that Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) has experienced a decline in interest from the smart money, it’s easy to see that there was a specific group of fund managers that slashed their full holdings heading into Q2. Intriguingly, Israel Englander’s Millennium Management dumped the largest position of all the hedgies followed by Insider Monkey, worth about $9.3 million in stock, and Nathan Fischel’s DAFNA Capital Management was right behind this move, as the fund said goodbye to about $2.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 9 funds heading into Q2.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) but similarly valued. These stocks are Monarch Casino & Resort, Inc. (NASDAQ:MCRI), ESSA Pharma Inc. (NASDAQ:EPIX), Mersana Therapeutics, Inc. (NASDAQ:MRSN), Enerplus Corp (NYSE:ERF), Dynavax Technologies Corporation (NASDAQ:DVAX), SecureWorks Corp. (NASDAQ:SCWX), and Brookdale Senior Living, Inc. (NYSE:BKD). All of these stocks’ market caps match CNST’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MCRI 13 97368 -1
EPIX 28 400204 10
MRSN 25 357646 -5
ERF 19 145392 2
DVAX 14 81307 0
SCWX 12 20191 1
BKD 23 386290 4
Average 19.1 212628 1.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.1 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $325 million in CNST’s case. ESSA Pharma Inc. (NASDAQ:EPIX) is the most popular stock in this table. On the other hand SecureWorks Corp. (NASDAQ:SCWX) is the least popular one with only 12 bullish hedge fund positions. Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CNST is 62. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through July 9th and still beat the market by 6.7 percentage points. Hedge funds were also right about betting on CNST as the stock returned 45.2% since the end of Q1 (through 7/9) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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