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Were Hedge Funds Right About Ditching Enanta Pharmaceuticals Inc (ENTA)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Enanta Pharmaceuticals Inc (NASDAQ:ENTA) and determine whether hedge funds skillfully traded this stock.

Is Enanta Pharmaceuticals Inc (NASDAQ:ENTA) a buy right now? Money managers were getting less optimistic. The number of long hedge fund bets retreated by 3 in recent months. Our calculations also showed that ENTA 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a look at the latest hedge fund action encompassing Enanta Pharmaceuticals Inc (NASDAQ:ENTA).

How have hedgies been trading Enanta Pharmaceuticals Inc (NASDAQ:ENTA)?

At Q1’s end, a total of 18 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 20 hedge funds with a bullish position in ENTA a year ago. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Is ENTA A Good Stock To Buy?

Among these funds, Farallon Capital held the most valuable stake in Enanta Pharmaceuticals Inc (NASDAQ:ENTA), which was worth $90 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $45.3 million worth of shares. Armistice Capital, Marshall Wace LLP, and GLG Partners 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 Armistice Capital allocated the biggest weight to Enanta Pharmaceuticals Inc (NASDAQ:ENTA), around 1.81% of its 13F portfolio. Farallon Capital is also relatively very bullish on the stock, dishing out 0.79 percent of its 13F equity portfolio to ENTA.

Seeing as Enanta Pharmaceuticals Inc (NASDAQ:ENTA) has faced falling interest from the smart money, we can see that there is a sect of hedge funds that elected to cut their full holdings in the first quarter. It’s worth mentioning that Louis Bacon’s Moore Global Investments cut the largest investment of all the hedgies tracked by Insider Monkey, valued at about $4.4 million in stock. Minhua Zhang’s fund, Weld Capital Management, also dumped its stock, about $0.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds in the first quarter.

Let’s go over hedge fund activity in other stocks similar to Enanta Pharmaceuticals Inc (NASDAQ:ENTA). These stocks are John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS), SITE Centers Corp. (NYSE:SITC), Grupo Financiero Galicia S.A. (NASDAQ:GGAL), and Calavo Growers, Inc. (NASDAQ:CVGW). This group of stocks’ market values resemble ENTA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JBSS 14 63220 -3
SITC 21 47296 -1
GGAL 6 12134 -2
CVGW 11 63039 -12
Average 13 46422 -4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $46 million. That figure was $217 million in ENTA’s case. SITE Centers Corp. (NYSE:SITC) is the most popular stock in this table. On the other hand Grupo Financiero Galicia S.A. (NASDAQ:GGAL) is the least popular one with only 6 bullish hedge fund positions. Enanta Pharmaceuticals Inc (NASDAQ:ENTA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately ENTA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ENTA were disappointed as the stock returned -2.2% during the same time period 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 many of these stocks already outperformed the market so far this year.

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