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Did Hedge Funds Drop The Ball On Recro Pharma Inc (REPH)?

Asma UL Husna

Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. The S&P 500 Index ETF (SPY) lost 2.6% in the first two months of the second quarter. Ten out of 11 industry groups in the S&P 500 Index lost value in May. The average return of a randomly picked stock in the index was even worse (-3.6%). This means you (or a monkey throwing a dart) have less than an even chance of beating the market by randomly picking a stock. On the other hand, the top 20 most popular S&P 500 stocks among hedge funds not only generated positive returns but also outperformed the index by about 3 percentage points through May 30th. In this article, we will take a look at what hedge funds think about Recro Pharma Inc (NASDAQ:REPH).

Recro Pharma Inc (NASDAQ:REPH) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 11 hedge funds' portfolios at the end of the first quarter of 2019. 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 Pointer Telocation Limited (NASDAQ:PNTR), Sol-Gel Technologies Ltd. (NASDAQ:SLGL), and Capitala Finance Corp (NASDAQ:CPTA) to gather more data points.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Broadfin Kevin Kotler

We're going to take a look at the new hedge fund action encompassing Recro Pharma Inc (NASDAQ:REPH).

What does smart money think about Recro Pharma Inc (NASDAQ:REPH)?

At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2018. By comparison, 14 hedge funds held shares or bullish call options in REPH a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

REPH_june2019

More specifically, Broadfin Capital was the largest shareholder of Recro Pharma Inc (NASDAQ:REPH), with a stake worth $11.2 million reported as of the end of March. Trailing Broadfin Capital was Newtyn Management, which amassed a stake valued at $6.5 million. Engine Capital, Alyeska Investment Group, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Fondren Management).

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Recro Pharma Inc (NASDAQ:REPH) but similarly valued. We will take a look at Pointer Telocation Limited (NASDAQ:PNTR), Sol-Gel Technologies Ltd. (NASDAQ:SLGL), Capitala Finance Corp (NASDAQ:CPTA), and Alpine Immune Sciences, Inc. (NASDAQ:ALPN). This group of stocks' market values match REPH's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PNTR,4,6939,2 SLGL,3,7600,0 CPTA,3,1504,0 ALPN,6,55932,0 Average,4,17994,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $18 million. That figure was $35 million in REPH's case. Alpine Immune Sciences, Inc. (NASDAQ:ALPN) is the most popular stock in this table. On the other hand Sol-Gel Technologies Ltd. (NASDAQ:SLGL) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Recro Pharma Inc (NASDAQ:REPH) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Hedge funds were also right about betting on REPH as the stock returned 66.9% during the same period and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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