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Was The Smart Money Right About Aerie Pharmaceuticals Inc (AERI)?

Hedge funds don’t get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don’t realize is that 100% of the passive funds didn’t see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In this article we are going to take a look at the smart money sentiment towards Aerie Pharmaceuticals Inc (NASDAQ:AERI).

Is Aerie Pharmaceuticals Inc (NASDAQ:AERI) a worthy investment right now? Investors who are in the know are in a bearish mood. The number of bullish hedge fund bets decreased by 9 in recent months. Our calculations also showed that AERI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). AERI was in 21 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 30 hedge funds in our database with AERI holdings at the end of the previous quarter.

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 41 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.

Jim Tananbaum - Foresite Capital

Jim Tananbaum of Foresite Capital

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with high accuracy, so we check out his stock picks. 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 S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s view the latest hedge fund action regarding Aerie Pharmaceuticals Inc (NASDAQ:AERI).

How have hedgies been trading Aerie Pharmaceuticals Inc (NASDAQ:AERI)?

At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AERI over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AERI A Good Stock To Buy?

The largest stake in Aerie Pharmaceuticals Inc (NASDAQ:AERI) was held by Partner Fund Management, which reported holding $58.3 million worth of stock at the end of September. It was followed by Foresite Capital with a $56.8 million position. Other investors bullish on the company included Deerfield Management, Levin Capital Strategies, and Kingdon Capital. In terms of the portfolio weights assigned to each position Foresite Capital allocated the biggest weight to Aerie Pharmaceuticals Inc (NASDAQ:AERI), around 31.84% of its 13F portfolio. Kingdon Capital is also relatively very bullish on the stock, dishing out 4.46 percent of its 13F equity portfolio to AERI.

Due to the fact that Aerie Pharmaceuticals Inc (NASDAQ:AERI) has faced bearish sentiment from the entirety of the hedge funds we track, we can see that there were a few hedge funds that slashed their positions entirely in the third quarter. Interestingly, Steve Cohen’s Point72 Asset Management sold off the largest investment of the 750 funds watched by Insider Monkey, comprising close to $27.2 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also cut its stock, about $7.5 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 9 funds in the third quarter.

Let’s also examine hedge fund activity in other stocks similar to Aerie Pharmaceuticals Inc (NASDAQ:AERI). These stocks are Fangdd Network Group Ltd. (NASDAQ:DUO), Chase Corporation (NYSE:CCF), LendingClub Corp (NYSE:LC), and Criteo SA (NASDAQ:CRTO). This group of stocks’ market values are closest to AERI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DUO 1 549 1
CCF 9 96736 0
LC 8 3152 0
CRTO 10 114490 -3
Average 7 53732 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $340 million in AERI’s case. Criteo SA (NASDAQ:CRTO) is the most popular stock in this table. On the other hand Fangdd Network Group Ltd. (NASDAQ:DUO) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Aerie Pharmaceuticals Inc (NASDAQ:AERI) 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 gained 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately AERI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AERI were disappointed as the stock returned -40.8% during the four months of 2020 (through May 1st) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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