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Were Hedge Funds Right About Warming Up To Omeros Corporation (OMER)?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

Is Omeros Corporation (NASDAQ:OMER) going to take off soon? The best stock pickers are taking an optimistic view. The number of bullish hedge fund bets moved up by 2 recently. Our calculations also showed that OMER isn’t among the 30 most popular stocks among hedge funds (see the video below). OMER was in 8 hedge funds’ portfolios at the end of June. There were 6 hedge funds in our database with OMER holdings at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 40 percentage points since May 2014 through May 30, 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.

OMER_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 analyze the new hedge fund action encompassing Omeros Corporation (NASDAQ:OMER).

How have hedgies been trading Omeros Corporation (NASDAQ:OMER)?

Heading into the third quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from the previous quarter. The graph below displays the number of hedge funds with bullish position in OMER over the last 16 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

D. E. Shaw

The largest stake in Omeros Corporation (NASDAQ:OMER) was held by Consonance Capital Management, which reported holding $47.9 million worth of stock at the end of March. It was followed by D E Shaw with a $35.8 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and OZ Management.

As one would reasonably expect, some big names were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, initiated the most valuable position in Omeros Corporation (NASDAQ:OMER). Citadel Investment Group had $0.9 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also initiated a $0.2 million position during the quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Omeros Corporation (NASDAQ:OMER) but similarly valued. We will take a look at CorePoint Lodging Inc. (NYSE:CPLG), Krystal Biotech, Inc. (NASDAQ:KRYS), Foundation Building Materials, Inc. (NYSE:FBM), and Bitauto Holdings Limited (NYSE:BITA). This group of stocks’ market caps are similar to OMER’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CPLG 8 16070 -5
KRYS 12 190349 -4
FBM 10 27347 2
BITA 7 11117 0
Average 9.25 61221 -1.75

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 $61 million. That figure was $98 million in OMER’s case. Krystal Biotech, Inc. (NASDAQ:KRYS) is the most popular stock in this table. On the other hand Bitauto Holdings Limited (NYSE:BITA) is the least popular one with only 7 bullish hedge fund positions. Omeros Corporation (NASDAQ:OMER) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on OMER, though not to the same extent, as the stock returned 4.1% during the third quarter and outperformed the market.

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

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