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Was Smart Money Right About Piling Into Cara Therapeutics Inc (CARA) in September?

Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Cara Therapeutics Inc (NASDAQ:CARA).

Is Cara Therapeutics Inc (NASDAQ:CARA) a safe investment now? Investors who are in the know are betting on the stock. The number of long hedge fund bets advanced by 3 in recent months. Our calculations also showed that CARA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). CARA was in 11 hedge funds’ portfolios at the end of the third quarter of 2019. There were 8 hedge funds in our database with CARA positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

FARALLON CAPITAL

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy  based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to review the new hedge fund action surrounding Cara Therapeutics Inc (NASDAQ:CARA).

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

At Q3’s end, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of 38% from the second quarter of 2019. By comparison, 11 hedge funds held shares or bullish call options in CARA a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Is CARA A Good Stock To Buy?

The largest stake in Cara Therapeutics Inc (NASDAQ:CARA) was held by Farallon Capital, which reported holding $39.3 million worth of stock at the end of September. It was followed by Chescapmanager LLC with a $22.7 million position. Other investors bullish on the company included Adage Capital Management, Opaleye Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Chescapmanager LLC allocated the biggest weight to Cara Therapeutics Inc (NASDAQ:CARA), around 3.23% of its 13F portfolio. Opaleye Management is also relatively very bullish on the stock, dishing out 2.91 percent of its 13F equity portfolio to CARA.

Now, specific money managers were breaking ground themselves. Adage Capital Management, managed by Phill Gross and Robert Atchinson, created the largest position in Cara Therapeutics Inc (NASDAQ:CARA). Adage Capital Management had $9.3 million invested in the company at the end of the quarter. James A. Silverman’s Opaleye Management also initiated a $8 million position during the quarter. The other funds with brand new CARA positions are Steve Cohen’s Point72 Asset Management and John Overdeck and David Siegel’s Two Sigma Advisors.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Cara Therapeutics Inc (NASDAQ:CARA) but similarly valued. These stocks are SP Plus Corp (NASDAQ:SP), Stoneridge, Inc. (NYSE:SRI), Connecticut Water Service, Inc. (NASDAQ:CTWS), and MGP Ingredients Inc (NASDAQ:MGPI). This group of stocks’ market values are closest to CARA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SP 11 99127 -2
SRI 15 80512 0
CTWS 7 34657 2
MGPI 10 47259 3
Average 10.75 65389 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $65 million. That figure was $105 million in CARA’s case. Stoneridge, Inc. (NYSE:SRI) is the most popular stock in this table. On the other hand Connecticut Water Service, Inc. (NASDAQ:CTWS) is the least popular one with only 7 bullish hedge fund positions. Cara Therapeutics Inc (NASDAQ:CARA) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on CARA as the stock returned 42.1% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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