Why Are These Biotechs Exploding Higher Today?

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.

DexCom, Inc. (NASDAQ:DXCM) is up after releasing strong preliminary third quarter results. For its quarter, the continuous glucose monitoring system company estimates that its revenues will be $105 million versus expectations of $97.7 million.

From the press release:

Demand for our G5 Mobile system has been overwhelming and our pipeline of new patient opportunities is larger than it has ever been. We have worked diligently to fulfill demand by new patients, we have commenced shipping upgrades to existing patients and we expect to complete the upgrade cycle before the end of 2015.

Given the new products and healthy growth, investors are right to be excited. Analysts, incidentally, are too. Following the release, Sterne Agee CRT upgraded DexCom to ‘Buy’ from ‘Neutral’ with a $90 price target, while Leerink Swann upgraded the company to ‘Outperform’ from ‘Market Perform’, with a $100 price target.

According to our data, hedge funds were bullish on DexCom, Inc. (NASDAQ:DXCM) in the second quarter. A total of 25 funds reported stakes worth $348.52 million (representing 5.50% of the float) in the latest round of 13F filings, up from 22 funds and $289.32 million in holdings respectively a quarter earlier. Donald Chiboucis‘ Columbus Circle Investors owns 906,909 shares, while Israel Englander’s Millenium Management owns 498,622 shares. Jerome Pfund and Micahel Sjostrom’s Sectoral Asset Management owns 398,158 shares.

Disclosure: None