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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 Cara Therapeutics Inc (NASDAQ:CARA)? The smart money sentiment can provide an answer to this question.
Is CARA a good stock to buy now? Cara Therapeutics Inc (NASDAQ:CARA) was in 19 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 18. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. CARA investors should pay attention to an increase in enthusiasm from smart money recently. There were 18 hedge funds in our database with CARA positions at the end of the second quarter. Our calculations also showed that CARA 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.
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' 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 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.
Mark Kingdon of Kingdon Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. Keeping this in mind let's take a peek at the recent hedge fund action regarding Cara Therapeutics Inc (NASDAQ:CARA).
Do Hedge Funds Think CARA Is A Good Stock To Buy Now?
At Q3's end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the second quarter of 2020. By comparison, 12 hedge funds held shares or bullish call options in CARA 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.
Of the funds tracked by Insider Monkey, Farallon Capital, holds the most valuable position in Cara Therapeutics Inc (NASDAQ:CARA). Farallon Capital has a $28.6 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is Chescapmanager LLC, managed by Traci Lerner, which holds a $16.7 million position; the fund has 2.7% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish include Mark Kingdon's Kingdon Capital, Renaissance Technologies and Neil Shahrestani's Ikarian Capital. In terms of the portfolio weights assigned to each position Chescapmanager LLC allocated the biggest weight to Cara Therapeutics Inc (NASDAQ:CARA), around 2.7% of its 13F portfolio. Prosight Capital is also relatively very bullish on the stock, earmarking 1.06 percent of its 13F equity portfolio to CARA.
Now, key hedge funds have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most valuable position in Cara Therapeutics Inc (NASDAQ:CARA). Arrowstreet Capital had $0.4 million invested in the company at the end of the quarter. Paul Tudor Jones's Tudor Investment Corp also made a $0.3 million investment in the stock during the quarter. The only other fund with a brand new CARA position is Mika Toikka's AlphaCrest Capital Management.
Let's now review hedge fund activity in other stocks similar to Cara Therapeutics Inc (NASDAQ:CARA). These stocks are Passage Bio, Inc. (NASDAQ:PASG), 3D Systems Corporation (NYSE:DDD), Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI), Diebold Nixdorf Incorporated (NYSE:DBD), Hawaiian Holdings, Inc. (NASDAQ:HA), Golar LNG Limited (NASDAQ:GLNG), and Seacor Holdings, Inc. (NYSE:CKH). All of these stocks' market caps resemble CARA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PASG,15,221636,2 DDD,15,33448,-3 SPPI,13,57477,3 DBD,15,125411,-1 HA,9,29092,-3 GLNG,22,151248,5 CKH,10,86903,2 Average,14.1,100745,0.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.1 hedge funds with bullish positions and the average amount invested in these stocks was $101 million. That figure was $76 million in CARA's case. Golar LNG Limited (NASDAQ:GLNG) is the most popular stock in this table. On the other hand Hawaiian Holdings, Inc. (NASDAQ:HA) is the least popular one with only 9 bullish hedge fund positions. Cara Therapeutics Inc (NASDAQ:CARA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CARA is 74.5. 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. 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 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on CARA as the stock returned 17.1% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.