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Should You Avoid SAGE Therapeutics Inc (SAGE)?

In this article you are going to find out whether hedge funds think SAGE Therapeutics Inc (NASDAQ:SAGE) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

SAGE Therapeutics Inc (NASDAQ:SAGE) investors should be aware of a decrease in enthusiasm from smart money recently. SAGE was in 30 hedge funds’ portfolios at the end of March. There were 35 hedge funds in our database with SAGE holdings at the end of the previous quarter. Our calculations also showed that SAGE isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 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.

Sander Gerber of Hudson Bay Capital

Sander Gerber of Hudson Bay Capital

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 trades like this oneWe 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. Now let’s take a peek at the new hedge fund action regarding SAGE Therapeutics Inc (NASDAQ:SAGE).

How have hedgies been trading SAGE Therapeutics Inc (NASDAQ:SAGE)?

At Q1’s end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the fourth quarter of 2019. On the other hand, there were a total of 28 hedge funds with a bullish position in SAGE a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Among these funds, Great Point Partners held the most valuable stake in SAGE Therapeutics Inc (NASDAQ:SAGE), which was worth $52.4 million at the end of the third quarter. On the second spot was Avoro Capital Advisors (venBio Select Advisor) which amassed $28.7 million worth of shares. Renaissance Technologies, Farallon Capital, and Millennium 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 Great Point Partners allocated the biggest weight to SAGE Therapeutics Inc (NASDAQ:SAGE), around 5.47% of its 13F portfolio. Integral Health Asset Management is also relatively very bullish on the stock, dishing out 2.15 percent of its 13F equity portfolio to SAGE.

Judging by the fact that SAGE Therapeutics Inc (NASDAQ:SAGE) has experienced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there were a few hedgies that decided to sell off their full holdings last quarter. Intriguingly, Brandon Haley’s Holocene Advisors sold off the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $24.1 million in stock. Nancy Zevenbergen’s fund, Zevenbergen Capital Investments, also sold off its stock, about $17.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 5 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as SAGE Therapeutics Inc (NASDAQ:SAGE) but similarly valued. We will take a look at PQ Group Holdings Inc. (NYSE:PQG), Trustmark Corp (NASDAQ:TRMK), Onto Innovation Inc. (NYSE:ONTO), and Moelis & Company (NYSE:MC). This group of stocks’ market caps resemble SAGE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PQG 7 36427 3
TRMK 13 11558 -3
ONTO 11 123006 -3
MC 10 37457 -3
Average 10.25 52112 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $258 million in SAGE’s case. Trustmark Corp (NASDAQ:TRMK) is the most popular stock in this table. On the other hand PQ Group Holdings Inc. (NYSE:PQG) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks SAGE Therapeutics Inc (NASDAQ:SAGE) is more popular among hedge funds. 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 returned 8.3% in 2020 through the end of May but still managed to beat the market by 13.2 percentage points. Hedge funds were also right about betting on SAGE as the stock returned 24.4% so far in Q2 (through the end of May) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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