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Were Hedge Funds Right About Selling Kiniksa Pharmaceuticals, Ltd. (KNSA)?

Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors’ favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds’ top consensus picks. This year hedge funds’ top 20 stock picks outperformed the S&P 500 Index by 4 percentage points through September 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.

Is Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) a healthy stock for your portfolio? Money managers are becoming less confident. The number of bullish hedge fund bets decreased by 1 lately. Our calculations also showed that KNSA isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Today there are a lot of signals stock traders use to value their holdings. A pair of the most under-the-radar signals are hedge fund and insider trading moves. Our experts have shown that, historically, those who follow the best picks of the top money managers can outpace the broader indices by a very impressive margin (see the details here).

KNSA_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a gander at the new hedge fund action regarding Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA).

What have hedge funds been doing with Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA)?

At Q2’s end, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in KNSA a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Felix Baker - Baker Bros.

More specifically, Baker Bros. Advisors was the largest shareholder of Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA), with a stake worth $37.9 million reported as of the end of March. Trailing Baker Bros. Advisors was Deerfield Management, which amassed a stake valued at $17.7 million. Vivo Capital, Citadel Investment Group, and Alyeska Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) has witnessed declining sentiment from hedge fund managers, we can see that there exists a select few hedge funds who were dropping their entire stakes heading into Q3. At the top of the heap, Bihua Chen’s Cormorant Asset Management dropped the largest stake of the “upper crust” of funds monitored by Insider Monkey, comprising about $4.9 million in stock. Ori Hershkovitz’s fund, Nexthera Capital, also cut its stock, about $1.2 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA). These stocks are Griffon Corporation (NYSE:GFF), Omeros Corporation (NASDAQ:OMER), Speedway Motorsports, Inc. (NYSE:TRK), and Grupo Supervielle S.A. (NYSE:SUPV). This group of stocks’ market caps match KNSA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GFF 9 113230 2
OMER 8 98181 2
TRK 9 23289 0
SUPV 7 35642 -5
Average 8.25 67586 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $68 million. That figure was $77 million in KNSA’s case. Griffon Corporation (NYSE:GFF) is the most popular stock in this table. On the other hand Grupo Supervielle S.A. (NYSE:SUPV) is the least popular one with only 7 bullish hedge fund positions. Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately KNSA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KNSA were disappointed as the stock returned -37.1% during the third 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 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.

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