Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won't accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
We're going to take a gander at the recent hedge fund action encompassing Tricida, Inc. (NASDAQ:TCDA).
What have hedge funds been doing with Tricida, Inc. (NASDAQ:TCDA)?
Heading into the first quarter of 2019, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. On the other hand, there were a total of 0 hedge funds with a bullish position in TCDA 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.
Among these funds, OrbiMed Advisors held the most valuable stake in Tricida, Inc. (NASDAQ:TCDA), which was worth $256.8 million at the end of the fourth quarter. On the second spot was venBio Select Advisor which amassed $41.3 million worth of shares. Moreover, Baker Bros. Advisors, Vivo Capital, and Cormorant Asset Management were also bullish on Tricida, Inc. (NASDAQ:TCDA), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Tricida, Inc. (NASDAQ:TCDA) has witnessed declining sentiment from the smart money, it's safe to say that there exists a select few fund managers that elected to cut their entire stakes heading into Q3. It's worth mentioning that Phill Gross and Robert Atchinson's Adage Capital Management sold off the biggest investment of the "upper crust" of funds monitored by Insider Monkey, comprising about $14.1 million in stock. Benjamin A. Smith's fund, Laurion Capital Management, also cut its stock, about $3.2 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 2 funds heading into Q3.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Tricida, Inc. (NASDAQ:TCDA) but similarly valued. These stocks are Golub Capital BDC Inc (NASDAQ:GBDC), Sonos, Inc. (NASDAQ:SONO), Cardiovascular Systems Inc (NASDAQ:CSII), and ConvergeOne Holdings, Inc. (NASDAQ:CVON). This group of stocks' market valuations are closest to TCDA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GBDC,10,28292,0 SONO,12,23760,2 CSII,21,153645,-1 CVON,5,72749,2 Average,12,69612,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $70 million. That figure was $406 million in TCDA's case. Cardiovascular Systems Inc (NASDAQ:CSII) is the most popular stock in this table. On the other hand ConvergeOne Holdings, Inc. (NASDAQ:CVON) is the least popular one with only 5 bullish hedge fund positions. Tricida, Inc. (NASDAQ:TCDA) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on TCDA as the stock returned 32.7% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.