Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Reata Pharmaceuticals, Inc. (NASDAQ:RETA) to find out whether it was one of their high conviction long-term ideas.
Hedge fund interest in Reata Pharmaceuticals, Inc. (NASDAQ:RETA) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare RETA to other stocks including Baozun Inc (NASDAQ:BZUN), Stepan Company (NYSE:SCL), and Crescent Point Energy Corp (NYSE:CPG) to get a better sense of its popularity.
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 market by 32 percentage points since May 2014 through March 12, 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let's take a glance at the new hedge fund action regarding Reata Pharmaceuticals, Inc. (NASDAQ:RETA).
What does the smart money think about Reata Pharmaceuticals, Inc. (NASDAQ:RETA)?
At Q4's end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2018. On the other hand, there were a total of 10 hedge funds with a bullish position in RETA a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Thomas Steyer's Farallon Capital has the most valuable position in Reata Pharmaceuticals, Inc. (NASDAQ:RETA), worth close to $39.3 million, amounting to 0.3% of its total 13F portfolio. On Farallon Capital's heels is Bihua Chen of Cormorant Asset Management, with a $37.8 million position; 3.1% of its 13F portfolio is allocated to the stock. Some other hedge funds and institutional investors that are bullish comprise James E. Flynn's Deerfield Management, Steve Cohen's Point72 Asset Management and Lawrence Hawkins's Prosight Capital.
Due to the fact that Reata Pharmaceuticals, Inc. (NASDAQ:RETA) has faced declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of fund managers who were dropping their full holdings by the end of the third quarter. Interestingly, Louis Bacon's Moore Global Investments dropped the largest position of the "upper crust" of funds monitored by Insider Monkey, comprising about $1.2 million in stock. Joseph Edelman's fund, Perceptive Advisors, also sold off its stock, about $0.8 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks similar to Reata Pharmaceuticals, Inc. (NASDAQ:RETA). These stocks are Baozun Inc (NASDAQ:BZUN), Stepan Company (NYSE:SCL), Crescent Point Energy Corp (NYSE:CPG), and Coca-Cola Consolidated, Inc. (NASDAQ:COKE). All of these stocks' market caps resemble RETA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BZUN,14,43238,-3 SCL,12,35740,2 CPG,16,82975,4 COKE,7,4650,-2 Average,12.25,41651,0.25 [/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 $42 million. That figure was $159 million in RETA's case. Crescent Point Energy Corp (NYSE:CPG) is the most popular stock in this table. On the other hand Coca-Cola Consolidated, Inc. (NASDAQ:COKE) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Reata Pharmaceuticals, Inc. (NASDAQ:RETA) is more popular among hedge funds. 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 RETA as the stock returned 38.5% 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.