Vital Therapies Inc (NASDAQ:VTL) and DexCom, Inc. (NASDAQ:DXCM) are making big moves in the right direction, as shares are up by 14% and 16.6% respectively in afternoon trading. Given large volume stock moves can provide valuable insight into the future direction of equities, let’s put the two companies under a microscope and find out why they’re rallying. Let’s also analyze what the smart money tracked by Insider Monkey thinks of them.
Vital Therapies Inc (NASDAQ:VTL) is up as sentiment around the company improves. Vital Therapies’ stock has been beaten up this year, with shares down by 73% year-to-date after the company reported disappointing results for its lead product ELAD system in a phase 3 trial in August. In the trial, ELAD failed to achieve its primary statistical endpoint of improved survival for patients with alcohol-induced liver decompensation. The company still has some runway, however, as it had $71.95 million in cash and cash equivalents on its balance sheet on June 30. Management laid off 30% of its workforce last month to conserve cash and to prepare for another potential phase 3 trial that will hopefully show better efficacy this time around.
Hedge funds were ambivalent towards Vital Therapies Inc (NASDAQ:VTL) in the second quarter. Of the 730 elite funds we track, just four had long positions on June 30, owning $2.85 million of the company’s shares, representing 0.60% of the float. That was however a step up from the lone fund which held $1.89 million worth of shares on March 31. Quant fund D E Shaw was the largest shareholder of Vital Therapies Inc (NASDAQ:VTL) in our database, with a holding of 81,551 shares, and was that long shareholder on March 31.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 ETF (SPY) by 53 percentage points (see more details here).
On the next page, we’ll put the DexCom rally under the microscope.