Were Hedge Funds Right About Dumping ContraFect Corp (CFRX)?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 ContraFect Corp (NASDAQ:CFRX).

ContraFect Corp (NASDAQ:CFRX) investors should pay attention to a decrease in enthusiasm from smart money in recent months. Our calculations also showed that CFRX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

According to most shareholders, hedge funds are seen as underperforming, outdated investment tools of the past. While there are greater than 8000 funds in operation today, Our researchers choose to focus on the top tier of this club, around 750 funds. Most estimates calculate that this group of people shepherd most of the smart money’s total asset base, and by watching their top stock picks, Insider Monkey has identified various investment strategies that have historically defeated the market. Insider Monkey’s flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points per annum since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Phill Gross of Adage Capital Management

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 as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind let’s take a look at the recent hedge fund action surrounding ContraFect Corp (NASDAQ:CFRX).

What does smart money think about ContraFect Corp (NASDAQ:CFRX)?

At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CFRX over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CFRX A Good Stock To Buy?

Among these funds, Adage Capital Management held the most valuable stake in ContraFect Corp (NASDAQ:CFRX), which was worth $1 million at the end of the third quarter. On the second spot was 683 Capital Partners which amassed $0.9 million worth of shares. Biotechnology Value Fund, Alyeska Investment Group, and Trellus Management Company 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 Trellus Management Company allocated the biggest weight to ContraFect Corp (NASDAQ:CFRX), around 0.19% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, setting aside 0.1 percent of its 13F equity portfolio to CFRX.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified CFRX as a viable investment and initiated a position in the stock.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as ContraFect Corp (NASDAQ:CFRX) but similarly valued. We will take a look at Zafgen Inc (NASDAQ:ZFGN), Bio-Path Holdings, Inc. (NASDAQ:BPTH), BioHiTech Global, Inc. (NASDAQ:BHTG), and Caladrius Biosciences Inc (NASDAQ:CLBS). This group of stocks’ market values resemble CFRX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ZFGN 12 8736 -2
BPTH 1 444 -1
BHTG 1 103 0
CLBS 1 1015 0
Average 3.75 2575 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 3.75 hedge funds with bullish positions and the average amount invested in these stocks was $3 million. That figure was $3 million in CFRX’s case. Zafgen Inc (NASDAQ:ZFGN) is the most popular stock in this table. On the other hand Bio-Path Holdings, Inc. (NASDAQ:BPTH) is the least popular one with only 1 bullish hedge fund positions. ContraFect Corp (NASDAQ:CFRX) 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 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. Unfortunately CFRX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CFRX were disappointed as the stock returned -3.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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