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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 Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX).
Is CRNX a good stock to buy now? Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) was in 15 hedge funds' portfolios at the end of September. The all time high for this statistic is 18. CRNX has experienced a decrease in enthusiasm from smart money lately. There were 18 hedge funds in our database with CRNX positions at the end of the second quarter. Our calculations also showed that CRNX 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.
Peter Kolchinsky of RA Capital Management
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. Now we're going to view the fresh hedge fund action encompassing Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX).
Do Hedge Funds Think CRNX Is A Good Stock To Buy Now?
At Q3's end, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in CRNX a year ago. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
The largest stake in Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) was held by Perceptive Advisors, which reported holding $57.3 million worth of stock at the end of September. It was followed by OrbiMed Advisors with a $43.1 million position. Other investors bullish on the company included RA Capital Management, Vivo Capital, and Driehaus Capital. In terms of the portfolio weights assigned to each position Burrage Capital Management allocated the biggest weight to Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX), around 2.98% of its 13F portfolio. Vivo Capital is also relatively very bullish on the stock, setting aside 2.05 percent of its 13F equity portfolio to CRNX.
Since Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) has faced falling interest from the smart money, it's easy to see that there lies a certain "tier" of funds who sold off their entire stakes in the third quarter. Intriguingly, Oleg Nodelman's EcoR1 Capital dumped the biggest investment of the 750 funds monitored by Insider Monkey, comprising close to $15.1 million in stock, and Brian Ashford-Russell and Tim Woolley's Polar Capital was right behind this move, as the fund cut about $3.1 million worth. These moves are interesting, as total hedge fund interest dropped by 3 funds in the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) but similarly valued. These stocks are 111, Inc. (NASDAQ:YI), AMC Entertainment Holdings Inc (NYSE:AMC), Banco BBVA Argentina S.A. (NYSE:BBAR), Clovis Oncology Inc (NASDAQ:CLVS), Nautilus, Inc. (NYSE:NLS), Loma Negra Compania Industrial Argentina Sociedad Anonima (NYSE:LOMA), and Front Yard Residential Corporation (NYSE:RESI). This group of stocks' market caps are similar to CRNX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position YI,4,7523,0 AMC,12,7804,4 BBAR,3,2782,-5 CLVS,15,69500,-3 NLS,17,86762,5 LOMA,9,37079,-2 RESI,20,56519,-5 Average,11.4,38281,-0.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.4 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $209 million in CRNX's case. Front Yard Residential Corporation (NYSE:RESI) is the most popular stock in this table. On the other hand Banco BBVA Argentina S.A. (NYSE:BBAR) is the least popular one with only 3 bullish hedge fund positions. Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CRNX is 62.3. 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 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately CRNX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CRNX were disappointed as the stock returned -12.4% since the end of September (through 12/14) 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.