Shares of Heron Therapeutics Inc (NASDAQ:HRTX) are up by more than 20% in early trading, following positive Phase 2 reports on HTX-011, an anesthetic and anti-inflammatory drug designed to lower pain following bunion removal surgery. On the other hand, Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) opened lower today as shares took a hammering in late trading yesterday, tumbling by 5%. The stock was recently downgraded by Gabelli analysts to ‘Sell’ from ‘Hold’, while analysts at Zacks have rated the stock a ‘Hold’ for the short term with a price target of $15.69. However, the hedge fund sentiment towards both stocks has registered an improvement during the 2015 second quarter, although Heron enjoys more popularity. So let’s take a closer look at the developments that affected the performance of Heron and Lexicon today and see whether hedge fund sentiment suggest that they represent solid investment opportunities.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 118% over the last 36 months and outperformed the S&P 500 Index by 60 percentage points (see more details here).
According to a summary of the test results provided by Heron Therapeutics Inc (NASDAQ:HRTX), the HTX-011 drug has managed to reduce pain intensity by 69% in the first 24 hours and by 40% in 72 hours following surgery, making it more efficient than a placebo.
“We are very pleased with these results, and we now will turn our attention to executing on a broad-based development program designed to enable us to bring HTX-011 to the many patients undergoing a wide range of surgeries who experience significant post-operative pain,” said Barry D. Quart, CEO of Heron Therapeutics.
Heron Therapeutics Inc (NASDAQ:HRTX) has enjoyed a massive popularity boost among the hedge funds that we track, with the total value of their holding increasing almost threefold during the second quarter of 2015, reaching $617 million, while the number of funds holding the stock rose to 20 from 18. Mark Kingdon, the manager of Kingdon Capital, was busy hoarding shares of Heron during the quarter, taking his position to 822,417 shares, while Julian Baker And Felix Baker have boosted their stake by 8%. Their fund, Baker Bros. Advisors, has reported ownership of approximately 2.81 million shares of Heron Therapeutics in its latest 13F filing. Tang Capital Management, run by Kevin C. Tang, holds the biggest investment in Heron among the hedge funds that we track: 5.19 million shares, up 6% for the quarter.