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Did Hedge Funds Drop The Ball On Insmed Incorporated (INSM) ?

Reymerlyn Martin

"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Insmed Incorporated (NASDAQ:INSM) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Insmed Incorporated (NASDAQ:INSM) shareholders have witnessed a decrease in support from the world's most elite money managers lately. Our calculations also showed that INSM 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

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_758402" align="aligncenter" width="600"] William Leland Edwards of Palo Alto Investors[/caption]

William Leland Edwards of Palo Alto Investors

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. Let's check out the fresh hedge fund action encompassing Insmed Incorporated (NASDAQ:INSM).

What have hedge funds been doing with Insmed Incorporated (NASDAQ:INSM)?

At the end of the third quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in INSM a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Among these funds, Palo Alto Investors held the most valuable stake in Insmed Incorporated (NASDAQ:INSM), which was worth $127.7 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $54 million worth of shares. D E Shaw, Baker Bros. Advisors, and Vivo Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Palo Alto Investors allocated the biggest weight to Insmed Incorporated (NASDAQ:INSM), around 8.51% of its 13F portfolio. Vivo Capital is also relatively very bullish on the stock, designating 2.81 percent of its 13F equity portfolio to INSM.

Due to the fact that Insmed Incorporated (NASDAQ:INSM) has witnessed falling interest from the aggregate hedge fund industry, we can see that there were a few fund managers that elected to cut their entire stakes by the end of the third quarter. Intriguingly, Mitchell Blutt's Consonance Capital Management cut the largest stake of all the hedgies followed by Insider Monkey, worth about $43.8 million in stock, and Brian Ashford-Russell and Tim Woolley's Polar Capital was right behind this move, as the fund said goodbye to about $12.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to Insmed Incorporated (NASDAQ:INSM). We will take a look at La-Z-Boy Incorporated (NYSE:LZB), Park National Corporation (NYSEAMEX:PRK), Chesapeake Utilities Corporation (NYSE:CPK), and Safety Insurance Group, Inc. (NASDAQ:SAFT). This group of stocks' market valuations resemble INSM's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LZB,23,92601,2 PRK,8,15270,0 CPK,8,42923,-1 SAFT,9,47348,-1 Average,12,49536,0 [/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 $50 million. That figure was $373 million in INSM's case. La-Z-Boy Incorporated (NYSE:LZB) is the most popular stock in this table. On the other hand Park National Corporation (NYSEAMEX:PRK) is the least popular one with only 8 bullish hedge fund positions. Insmed Incorporated (NASDAQ:INSM) 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 INSM as the stock returned 30.7% 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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