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Did Hedge Funds Drop The Ball On Sarepta Therapeutics Inc (SRPT) ?

Abigail Fisher

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 750 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Sarepta Therapeutics Inc (NASDAQ:SRPT) in this article.

Sarepta Therapeutics Inc (NASDAQ:SRPT) has experienced a decrease in support from the world's most elite money managers lately. Our calculations also showed that SRPT isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 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' 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 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 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.

[caption id="attachment_728973" align="aligncenter" width="473"] Oleg Nodelman of EcoR1 Capital[/caption]

Oleg Nodelman EcoR1 Capital

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. We're going to check out the new hedge fund action surrounding Sarepta Therapeutics Inc (NASDAQ:SRPT).

What have hedge funds been doing with Sarepta Therapeutics Inc (NASDAQ:SRPT)?

At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the second quarter of 2019. By comparison, 43 hedge funds held shares or bullish call options in SRPT a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

SRPT_dec2019

The largest stake in Sarepta Therapeutics Inc (NASDAQ:SRPT) was held by Adage Capital Management, which reported holding $129.9 million worth of stock at the end of September. It was followed by venBio Select Advisor with a $126.4 million position. Other investors bullish on the company included Cadian Capital, OrbiMed Advisors, and Camber Capital Management. In terms of the portfolio weights assigned to each position venBio Select Advisor allocated the biggest weight to Sarepta Therapeutics Inc (NASDAQ:SRPT), around 5.27% of its portfolio. Casdin Capital is also relatively very bullish on the stock, dishing out 5.09 percent of its 13F equity portfolio to SRPT.

Since Sarepta Therapeutics Inc (NASDAQ:SRPT) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of money managers that decided to sell off their positions entirely heading into Q4. Intriguingly, Christopher James's Partner Fund Management said goodbye to the biggest stake of the "upper crust" of funds monitored by Insider Monkey, valued at about $83.1 million in stock. Farallon Capital, also sold off its stock, about $76 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 15 funds heading into Q4.

Let's also examine hedge fund activity in other stocks similar to Sarepta Therapeutics Inc (NASDAQ:SRPT). These stocks are World Wrestling Entertainment, Inc. (NYSE:WWE), The Howard Hughes Corporation (NYSE:HHC), IAA, Inc. (NYSE:IAA), and KT Corporation (NYSE:KT). This group of stocks' market caps are closest to SRPT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WWE,34,1203910,-5 HHC,25,527177,-1 IAA,31,758086,-11 KT,18,267914,-1 Average,27,689272,-4.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $689 million. That figure was $801 million in SRPT's case. World Wrestling Entertainment, Inc. (NYSE:WWE) is the most popular stock in this table. On the other hand KT Corporation (NYSE:KT) is the least popular one with only 18 bullish hedge fund positions. Sarepta Therapeutics Inc (NASDAQ:SRPT) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on SRPT as the stock returned 49.3% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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