Were Hedge Funds Right About Piling Into Menlo Therapeutics Inc. (MNLO)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Menlo Therapeutics Inc. (NASDAQ:MNLO) and determine whether the smart money was really smart about this stock.

Menlo Therapeutics Inc. (NASDAQ:MNLO) was in 18 hedge funds’ portfolios at the end of the first quarter of 2020. MNLO investors should pay attention to an increase in activity from the world’s largest hedge funds lately. There were 7 hedge funds in our database with MNLO holdings at the end of the previous quarter. Our calculations also showed that MNLO 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Samuel Isaly Orbimed Advisors

Samuel Isaly of OrbiMed Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. 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 let’s take a look at the key hedge fund action regarding Menlo Therapeutics Inc. (NASDAQ:MNLO).

Hedge fund activity in Menlo Therapeutics Inc. (NASDAQ:MNLO)

At Q1’s end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 157% from the previous quarter. On the other hand, there were a total of 9 hedge funds with a bullish position in MNLO 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.

More specifically, Perceptive Advisors was the largest shareholder of Menlo Therapeutics Inc. (NASDAQ:MNLO), with a stake worth $17.5 million reported as of the end of September. Trailing Perceptive Advisors was Vivo Capital, which amassed a stake valued at $10.3 million. 683 Capital Partners, OrbiMed Advisors, and Great Point 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 Healthcare Value Capital allocated the biggest weight to Menlo Therapeutics Inc. (NASDAQ:MNLO), around 3.83% of its 13F portfolio. Vivo Capital is also relatively very bullish on the stock, setting aside 0.93 percent of its 13F equity portfolio to MNLO.

As aggregate interest increased, key hedge funds have jumped into Menlo Therapeutics Inc. (NASDAQ:MNLO) headfirst. Perceptive Advisors, managed by Joseph Edelman, established the largest position in Menlo Therapeutics Inc. (NASDAQ:MNLO). Perceptive Advisors had $17.5 million invested in the company at the end of the quarter. Ari Zweiman’s 683 Capital Partners also initiated a $5.4 million position during the quarter. The following funds were also among the new MNLO investors: Samuel Isaly’s OrbiMed Advisors, Steve Cohen’s Point72 Asset Management, and Joe Riccardo’s Healthcare Value Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Menlo Therapeutics Inc. (NASDAQ:MNLO) but similarly valued. We will take a look at Ovid Therapeutics Inc. (NASDAQ:OVID), Jounce Therapeutics, Inc. (NASDAQ:JNCE), FedNat Holding Co (NASDAQ:FNHC), and Fidus Investment Corp (NASDAQ:FDUS). This group of stocks’ market caps resemble MNLO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OVID 12 18770 -5
JNCE 10 8854 -6
FNHC 7 12007 1
FDUS 8 3314 2
Average 9.25 10736 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $11 million. That figure was $54 million in MNLO’s case. Ovid Therapeutics Inc. (NASDAQ:OVID) is the most popular stock in this table. On the other hand FedNat Holding Co (NASDAQ:FNHC) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Menlo Therapeutics Inc. (NASDAQ:MNLO) 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. Unfortunately MNLO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MNLO were disappointed as the stock returned -36.6% since the end of the first quarter 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.

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