Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Jounce Therapeutics, Inc. (NASDAQ:JNCE) has seen a decrease in hedge fund sentiment lately. JNCE was in 9 hedge funds' portfolios at the end of the third quarter of 2019. There were 10 hedge funds in our database with JNCE positions at the end of the previous quarter. Our calculations also showed that JNCE 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.
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_365194" align="alignnone" width="600"] David E. Shaw of D.E. Shaw[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let's check out the new hedge fund action surrounding Jounce Therapeutics, Inc. (NASDAQ:JNCE).
Hedge fund activity in Jounce Therapeutics, Inc. (NASDAQ:JNCE)
Heading into the fourth quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards JNCE over the last 17 quarters. With the smart money's sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in Jounce Therapeutics, Inc. (NASDAQ:JNCE) was held by D E Shaw, which reported holding $0.6 million worth of stock at the end of September. It was followed by Millennium Management with a $0.5 million position. Other investors bullish on the company included Two Sigma Advisors, Renaissance Technologies, and PDT Partners. In terms of the portfolio weights assigned to each position HighVista Strategies allocated the biggest weight to Jounce Therapeutics, Inc. (NASDAQ:JNCE), around 0.04% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, dishing out 0.03 percent of its 13F equity portfolio to JNCE.
Seeing as Jounce Therapeutics, Inc. (NASDAQ:JNCE) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of hedgies that slashed their entire stakes in the third quarter. At the top of the heap, Cliff Asness's AQR Capital Management said goodbye to the biggest stake of the "upper crust" of funds tracked by Insider Monkey, valued at about $1.4 million in stock, and Jeremy Green's Redmile Group was right behind this move, as the fund said goodbye to about $1.3 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds in the third quarter.
Let's go over hedge fund activity in other stocks similar to Jounce Therapeutics, Inc. (NASDAQ:JNCE). These stocks are SB Financial Group, Inc. (NASDAQ:SBFG), OncoCyte Corporation (NYSE:OCX), scPharmaceuticals Inc. (NASDAQ:SCPH), and LRAD Corp (NASDAQ:LRAD). This group of stocks' market caps are similar to JNCE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBFG,3,11334,0 OCX,4,23596,-2 SCPH,5,41043,0 LRAD,6,11989,4 Average,4.5,21991,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $2 million in JNCE's case. LRAD Corp (NASDAQ:LRAD) is the most popular stock in this table. On the other hand SB Financial Group, Inc. (NASDAQ:SBFG) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Jounce Therapeutics, Inc. (NASDAQ:JNCE) is more popular among hedge funds. 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 JNCE as the stock returned 62.5% during the first two months of Q4 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.