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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)? The smart money sentiment can provide an answer to this question.
Is ARNA a good stock to buy now? Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has seen an increase in activity from the world's largest hedge funds in recent months. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) was in 43 hedge funds' portfolios at the end of September. The all time high for this statistic is 41. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 41 hedge funds in our database with ARNA holdings at the end of June. Our calculations also showed that ARNA isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: 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 S&P 500 ETFs by more than 66 percentage points since March 2017 (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 stocks that are in our short portfolio.
Steven Cohen of Point72 Asset Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind let's analyze the new hedge fund action encompassing Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).
Do Hedge Funds Think ARNA Is A Good Stock To Buy Now?
At Q3's end, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from the second quarter of 2020. By comparison, 30 hedge funds held shares or bullish call options in ARNA a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) was held by Avoro Capital Advisors (venBio Select Advisor), which reported holding $231.8 million worth of stock at the end of September. It was followed by Alkeon Capital Management with a $130.1 million position. Other investors bullish on the company included Point72 Asset Management, Great Point Partners, and Holocene Advisors. In terms of the portfolio weights assigned to each position Great Point Partners allocated the biggest weight to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), around 6.71% of its 13F portfolio. Copernicus Capital Management is also relatively very bullish on the stock, designating 6.09 percent of its 13F equity portfolio to ARNA.
Consequently, specific money managers have been driving this bullishness. Laurion Capital Management, managed by Benjamin A. Smith, initiated the largest position in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). Laurion Capital Management had $22.4 million invested in the company at the end of the quarter. Louis Bacon's Moore Global Investments also initiated a $11.5 million position during the quarter. The other funds with new positions in the stock are Doron Breen and Mori Arkin's Sphera Global Healthcare Fund, John Overdeck and David Siegel's Two Sigma Advisors, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) but similarly valued. We will take a look at Starwood Property Trust, Inc. (NYSE:STWD), Ashland Global Holdings Inc.. (NYSE:ASH), China Biologic Products Holdings Inc (NASDAQ:CBPO), Silicon Laboratories (NASDAQ:SLAB), Sinopec Shanghai Petrochemical Co. (NYSE:SHI), Agora, Inc. (NASDAQ:API), and Manpowergroup Inc (NYSE:MAN). All of these stocks' market caps are similar to ARNA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STWD,17,93721,-5 ASH,46,1104849,14 CBPO,18,848680,-5 SLAB,26,99748,-2 SHI,3,10098,0 API,24,116132,-5 MAN,34,408974,0 Average,24,383172,-0.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $383 million. That figure was $990 million in ARNA's case. Ashland Global Holdings Inc.. (NYSE:ASH) is the most popular stock in this table. On the other hand Sinopec Shanghai Petrochemical Co. (NYSE:SHI) is the least popular one with only 3 bullish hedge fund positions. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ARNA is 83.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and beat the market again by 16.2 percentage points. Unfortunately ARNA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ARNA were disappointed as the stock returned -7.4% since the end of September (through 12/8) 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.
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Disclosure: None. This article was originally published at Insider Monkey.