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Why Are These Biotechs Exploding Higher Today?

Vital Therapies Inc (NASDAQ:VTL) and DexCom, Inc. (NASDAQ:DXCMare 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.

Wall Street Bull

Wall Street Bull

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.

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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.

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