At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Hedge fund interest in Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Focus Financial Partners Inc. (NASDAQ:FOCS), WestAmerica Bancorp. (NASDAQ:WABC), and Studio City International Holdings Limited (NYSE:MSC) to gather more data points. Our calculations also showed that IRWD isn't among the 30 most popular stocks among hedge funds (click for Q1 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_728973" align="aligncenter" width="400"] Oleg Nodelman of EcoR1 Capital[/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. With all of this in mind let's take a look at the fresh hedge fund action encompassing Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD).
What have hedge funds been doing with Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD)?
Heading into the second quarter of 2020, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in IRWD over the last 18 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Sarissa Capital Management held the most valuable stake in Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD), which was worth $136.5 million at the end of the third quarter. On the second spot was EcoR1 Capital which amassed $44.3 million worth of shares. MFN Partners, D E Shaw, and Bridger Management 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 Sarissa Capital Management allocated the biggest weight to Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD), around 17.41% of its 13F portfolio. EcoR1 Capital is also relatively very bullish on the stock, dishing out 4.63 percent of its 13F equity portfolio to IRWD.
Because Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of funds that decided to sell off their full holdings in the first quarter. Intriguingly, Andre F. Perold's HighVista Strategies dumped the largest position of all the hedgies followed by Insider Monkey, comprising close to $2.9 million in stock. Steve Cohen's fund, Point72 Asset Management, also dropped its stock, about $1.1 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 also examine hedge fund activity in other stocks - not necessarily in the same industry as Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) but similarly valued. These stocks are Focus Financial Partners Inc. (NASDAQ:FOCS), WestAmerica Bancorp. (NASDAQ:WABC), Studio City International Holdings Limited (NYSE:MSC), and Apache Corporation (NYSE:APA). This group of stocks' market valuations are closest to IRWD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FOCS,7,34941,-5 WABC,8,8181,-3 MSC,3,244275,-1 APA,35,142310,1 Average,13.25,107427,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $107 million. That figure was $335 million in IRWD's case. Apache Corporation (NYSE:APA) is the most popular stock in this table. On the other hand Studio City International Holdings Limited (NYSE:MSC) is the least popular one with only 3 bullish hedge fund positions. Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) 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 IRWD wasn't nearly as popular as these 10 stocks and hedge funds that were betting on IRWD were disappointed as the stock returned 2.3% 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.
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Disclosure: None. This article was originally published at Insider Monkey.