How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) and determine whether hedge funds had an edge regarding this stock.
Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 11 hedge funds' portfolios at the end of the first quarter of 2020. At the end of this article we will also compare LXRX to other stocks including Red Violet, Inc. (NASDAQ:RDVT), Stereotaxis Inc (NASDAQ:STXS), and Selecta Biosciences, Inc. (NASDAQ:SELB) to get a better sense of its popularity. Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_30621" align="aligncenter" width="400"] Cliff Asness of AQR Capital Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let's take a gander at the fresh hedge fund action encompassing Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX).
What does smart money think about Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX)?
At Q1's end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 12 hedge funds held shares or bullish call options in LXRX a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX), with a stake worth $3.3 million reported as of the end of September. Trailing Renaissance Technologies was AQR Capital Management, which amassed a stake valued at $2.8 million. Marshall Wace LLP, Arrowstreet Capital, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position PDT Partners allocated the biggest weight to Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX), around 0.03% of its 13F portfolio. Marshall Wace LLP is also relatively very bullish on the stock, dishing out 0.03 percent of its 13F equity portfolio to LXRX.
Since Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) has faced bearish sentiment from the entirety of the hedge funds we track, it's safe to say that there is a sect of money managers that elected to cut their full holdings heading into Q4. Intriguingly, Israel Englander's Millennium Management dumped the largest position of all the hedgies watched by Insider Monkey, totaling an estimated $5.4 million in stock, and George McCabe's Portolan Capital Management was right behind this move, as the fund dropped about $2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX). We will take a look at Red Violet, Inc. (NASDAQ:RDVT), Stereotaxis Inc (NASDAQ:STXS), Selecta Biosciences, Inc. (NASDAQ:SELB), and Gravity Co., LTD. (NASDAQ:GRVY). This group of stocks' market values match LXRX's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RDVT,5,9917,-4 STXS,13,84564,2 SELB,21,94687,8 GRVY,4,2026,-1 Average,10.75,47799,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $48 million. That figure was $13 million in LXRX's case. Selecta Biosciences, Inc. (NASDAQ:SELB) is the most popular stock in this table. On the other hand Gravity Co., LTD. (NASDAQ:GRVY) is the least popular one with only 4 bullish hedge fund positions. Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) is not the most popular stock in this group but hedge fund interest is still above average. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately LXRX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on LXRX were disappointed as the stock returned 2.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.