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Were Hedge Funds Right About Dumping OrthoPediatrics Corp. (KIDS) ?

“October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being ’08 and the Crash of ’87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the ’87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March ’09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher.” This is how Trapeze Asset Management summarized the recent market moves in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.

OrthoPediatrics Corp. (NASDAQ:KIDS) investors should pay attention to a decrease in enthusiasm from smart money lately. Our calculations also showed that kids isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

James Flynn Deerfield Management

Let’s take a glance at the key hedge fund action encompassing OrthoPediatrics Corp. (NASDAQ:KIDS).

How are hedge funds trading OrthoPediatrics Corp. (NASDAQ:KIDS)?

Heading into the first quarter of 2019, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from one quarter earlier. By comparison, 9 hedge funds held shares or bullish call options in KIDS a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with KIDS Positions

Of the funds tracked by Insider Monkey, Richard Driehaus’s Driehaus Capital has the most valuable position in OrthoPediatrics Corp. (NASDAQ:KIDS), worth close to $15.8 million, comprising 0.7% of its total 13F portfolio. Coming in second is Chuck Royce of Royce & Associates, with a $6.7 million position; 0.1% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism consist of Efrem Kamen’s Pura Vida Investments, James E. Flynn’s Deerfield Management and D. E. Shaw’s D E Shaw.

Since OrthoPediatrics Corp. (NASDAQ:KIDS) has faced bearish sentiment from the smart money, logic holds that there was a specific group of money managers that slashed their entire stakes by the end of the third quarter. It’s worth mentioning that Kamran Moghtaderi’s Eversept Partners dumped the largest position of all the hedgies tracked by Insider Monkey, totaling an estimated $0.7 million in stock, and Jim Simons’s Renaissance Technologies was right behind this move, as the fund dumped about $0.2 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 2 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as OrthoPediatrics Corp. (NASDAQ:KIDS) but similarly valued. These stocks are Eidos Therapeutics, Inc. (NASDAQ:EIDX), Avianca Holdings SA (NYSE:AVH), AquaVenture Holdings Limited (NYSE:WAAS), and Bridge Bancorp, Inc. (NASDAQ:BDGE). This group of stocks’ market caps match KIDS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EIDX 8 116233 -6
AVH 4 5892 0
WAAS 11 26946 -1
BDGE 9 86830 -2
Average 8 58975 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $29 million in KIDS’s case. AquaVenture Holdings Limited (NYSE:WAAS) is the most popular stock in this table. On the other hand Avianca Holdings SA (NYSE:AVH) is the least popular one with only 4 bullish hedge fund positions. OrthoPediatrics Corp. (NASDAQ:KIDS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately KIDS wasn’t nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); KIDS investors were disappointed as the stock returned 5.8% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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

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