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Did Hedge Funds Make The Right Call On Verastem Inc (VSTM) ?

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Abigail Fisher
·6 min read
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We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Verastem Inc (NASDAQ:VSTM) and determine whether hedge funds skillfully traded this stock.

Is Verastem Inc (NASDAQ:VSTM) the right pick for your portfolio? Money managers were in an optimistic mood. The number of bullish hedge fund bets increased by 9 in recent months. Our calculations also showed that VSTM 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). VSTM was in 17 hedge funds' portfolios at the end of March. There were 8 hedge funds in our database with VSTM holdings at the end of the previous quarter.

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 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 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. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's take a peek at the fresh hedge fund action surrounding Verastem Inc (NASDAQ:VSTM).

What have hedge funds been doing with Verastem Inc (NASDAQ:VSTM)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 113% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in VSTM a year ago. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

The largest stake in Verastem Inc (NASDAQ:VSTM) was held by RA Capital Management, which reported holding $49.1 million worth of stock at the end of September. It was followed by Vivo Capital with a $21.5 million position. Other investors bullish on the company included Biotechnology Value Fund / BVF Inc, Point72 Asset Management, and Ikarian Capital. In terms of the portfolio weights assigned to each position Acuta Capital Partners allocated the biggest weight to Verastem Inc (NASDAQ:VSTM), around 4.6% of its 13F portfolio. Logos Capital is also relatively very bullish on the stock, designating 2.1 percent of its 13F equity portfolio to VSTM.

Consequently, key money managers were leading the bulls' herd. RA Capital Management, managed by Peter Kolchinsky, created the most outsized position in Verastem Inc (NASDAQ:VSTM). RA Capital Management had $49.1 million invested in the company at the end of the quarter. Albert Cha and Frank Kung's Vivo Capital also initiated a $21.5 million position during the quarter. The other funds with new positions in the stock are Steve Cohen's Point72 Asset Management, Neil Shahrestani's Ikarian Capital, and Farallon Capital.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Verastem Inc (NASDAQ:VSTM) but similarly valued. These stocks are FRP Holdings Inc (NASDAQ:FRPH), Bridge Bancorp, Inc. (NASDAQ:BDGE), Turning Point Brands, Inc. (NYSE:TPB), and The Meet Group Inc (NASDAQ:MEET). This group of stocks' market caps resemble VSTM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FRPH,7,33574,-1 BDGE,7,60476,-3 TPB,14,48228,-2 MEET,21,96815,6 Average,12.25,59773,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $60 million. That figure was $174 million in VSTM's case. The Meet Group Inc (NASDAQ:MEET) is the most popular stock in this table. On the other hand FRP Holdings Inc (NASDAQ:FRPH) is the least popular one with only 7 bullish hedge fund positions. Verastem Inc (NASDAQ:VSTM) 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately VSTM wasn't nearly as popular as these 10 stocks and hedge funds that were betting on VSTM were disappointed as the stock returned -46.2% 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.

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