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Should You Buy Novan, Inc. (NOVN)?

Nina Todic

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 of 2018 due to various reasons. Nevertheless, the data show elite investors' consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETF by more than 8 percentage points so far this year. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at Novan, Inc. (NASDAQ:NOVN) from the perspective of those elite funds.

Is Novan, Inc. (NASDAQ:NOVN) a buy right now? Money managers are turning bullish. The number of bullish hedge fund bets inched up by 2 lately. Our calculations also showed that NOVN isn't among the 30 most popular stocks among hedge funds.

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. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_27676" align="aligncenter" width="355"] Israel Englander of Millennium Management[/caption]

MILLENNIUM MANAGEMENT

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's check out the new hedge fund action regarding Novan, Inc. (NASDAQ:NOVN).

What does smart money think about Novan, Inc. (NASDAQ:NOVN)?

At the end of the third quarter, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 200% from the second quarter of 2019. By comparison, 2 hedge funds held shares or bullish call options in NOVN a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

No of Hedge Funds with NOVN Positions

According to Insider Monkey's hedge fund database, Renaissance Technologies has the biggest position in Novan, Inc. (NASDAQ:NOVN), worth close to $0.6 million, accounting for less than 0.1%% of its total 13F portfolio. Coming in second is Millennium Management, led by Israel Englander, holding a $0 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. In terms of the portfolio weights assigned to each position Renaissance Technologies allocated the biggest weight to Novan, Inc. (NASDAQ:NOVN), around 0.0005% of its portfolio. Millennium Management is also relatively very bullish on the stock, earmarking 0.0001 percent of its 13F equity portfolio to NOVN.

As aggregate interest increased, key money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, initiated the most valuable position in Novan, Inc. (NASDAQ:NOVN). Millennium Management had $0 million invested in the company at the end of the quarter. Ken Griffin's Citadel Investment Group also made a $0 million investment in the stock during the quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Novan, Inc. (NASDAQ:NOVN) but similarly valued. These stocks are Quintana Energy Services Inc. (NYSE:QES), Lonestar Resources US Inc. (NASDAQ:LONE), Sharps Compliance Corp. (NASDAQ:SMED), and Acme United Corporation (NYSE:ACU). All of these stocks' market caps match NOVN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position QES,3,6899,0 LONE,4,12152,-1 SMED,1,2013,0 ACU,2,6006,0 Average,2.5,6768,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 2.5 hedge funds with bullish positions and the average amount invested in these stocks was $7 million. That figure was $1 million in NOVN's case. Lonestar Resources US Inc. (NASDAQ:LONE) is the most popular stock in this table. On the other hand Sharps Compliance Corp. (NASDAQ:SMED) is the least popular one with only 1 bullish hedge fund positions. Novan, Inc. (NASDAQ:NOVN) 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 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately NOVN wasn't nearly as popular as these 20 stocks and hedge funds that were betting on NOVN were disappointed as the stock returned -23.3% during the fourth quarter (through 11/22) 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.

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

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