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Should I Avoid Terns Pharmaceuticals, Inc. (TERN)?

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With the second-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the third quarter of 2021. One of these stocks was Terns Pharmaceuticals, Inc. (NASDAQ:TERN).

Is Terns Pharmaceuticals, Inc. (NASDAQ:TERN) an outstanding stock to buy now? Money managers were selling. The number of long hedge fund bets were trimmed by 4 in recent months. Terns Pharmaceuticals, Inc. (NASDAQ:TERN) was in 10 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 14. Our calculations also showed that TERN isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Hedge funds have more than $3.5 trillion in assets under management, so you can't expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds' moves today.

Dmitry Balyasny of Balyasny Asset Managemnet
Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we're going to take a look at the recent hedge fund action regarding Terns Pharmaceuticals, Inc. (NASDAQ:TERN).

Do Hedge Funds Think TERN Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards TERN over the last 24 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, OrbiMed Advisors, holds the largest position in Terns Pharmaceuticals, Inc. (NASDAQ:TERN). OrbiMed Advisors has a $46.5 million position in the stock, comprising 0.5% of its 13F portfolio. On OrbiMed Advisors's heels is Vivo Capital, managed by Albert Cha and Frank Kung, which holds a $32.8 million position; 1.4% of its 13F portfolio is allocated to the company. Some other professional money managers that hold long positions encompass James E. Flynn's Deerfield Management, Aaron Cowen's Suvretta Capital Management and Himanshu Gulati's Antara Capital. In terms of the portfolio weights assigned to each position Vivo Capital allocated the biggest weight to Terns Pharmaceuticals, Inc. (NASDAQ:TERN), around 1.42% of its 13F portfolio. Antara Capital is also relatively very bullish on the stock, designating 0.52 percent of its 13F equity portfolio to TERN.

Due to the fact that Terns Pharmaceuticals, Inc. (NASDAQ:TERN) has faced bearish sentiment from the smart money, it's safe to say that there is a sect of fund managers that slashed their entire stakes in the second quarter. Intriguingly, Christopher James's Partner Fund Management cut the biggest position of the 750 funds monitored by Insider Monkey, valued at about $7.2 million in stock, and Doron Breen and Mori Arkin's Sphera Global Healthcare Fund was right behind this move, as the fund sold off about $1.5 million worth. These transactions are interesting, as total hedge fund interest was cut by 4 funds in the second quarter.

Let's now review hedge fund activity in other stocks similar to Terns Pharmaceuticals, Inc. (NASDAQ:TERN). These stocks are WhiteHorse Finance, Inc. (NASDAQ:WHF), Liberty Tripadvisor Holdings Inc (NASDAQ:LTRPA), Peoples Financial Services Corp. (NASDAQ:PFIS), First Internet Bancorp (NASDAQ:INBK), Xunlei Ltd (NASDAQ:XNET), BRT Apartments Corp (NYSE:BRT), and Drive Shack Inc. (NYSE:DS). This group of stocks' market values are closest to TERN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WHF,3,2420,0 LTRPA,22,92790,1 PFIS,1,1563,-2 INBK,11,14963,1 XNET,8,5931,1 BRT,7,14726,4 DS,12,22148,-4 Average,9.1,22077,0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.1 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $136 million in TERN's case. Liberty Tripadvisor Holdings Inc (NASDAQ:LTRPA) is the most popular stock in this table. On the other hand Peoples Financial Services Corp. (NASDAQ:PFIS) is the least popular one with only 1 bullish hedge fund positions. Terns Pharmaceuticals, Inc. (NASDAQ:TERN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TERN is 43.9. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 25.7% in 2021 through September 27th and beat the market again by 6.2 percentage points. Unfortunately TERN wasn't nearly as popular as these 5 stocks and hedge funds that were betting on TERN were disappointed as the stock returned -8.9% since the end of June (through 9/27) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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