U.S. markets closed

Eidos Therapeutics, Inc. (EIDX): Are Hedge Funds Right About This Stock?

Abigail Fisher

We are still in an overall bull market and many stocks that smart money investors were piling into 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. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Eidos Therapeutics, Inc. (NASDAQ:EIDX).

Eidos Therapeutics, Inc. (NASDAQ:EIDX) has experienced an increase in activity from the world's largest hedge funds lately. EIDX was in 14 hedge funds' portfolios at the end of the third quarter of 2019. There were 11 hedge funds in our database with EIDX positions at the end of the previous quarter. Our calculations also showed that EIDX 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

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_261250" align="aligncenter" width="450"] Peter Kolchinsky of RA Capital Management[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. We're going to check out the fresh hedge fund action surrounding Eidos Therapeutics, Inc. (NASDAQ:EIDX).

How have hedgies been trading Eidos Therapeutics, Inc. (NASDAQ:EIDX)?

At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 27% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in EIDX a year ago. With the smart money's sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

Among these funds, RA Capital Management held the most valuable stake in Eidos Therapeutics, Inc. (NASDAQ:EIDX), which was worth $77.8 million at the end of the third quarter. On the second spot was Redmile Group which amassed $33.2 million worth of shares. Perceptive Advisors, Cormorant Asset Management, and Opaleye Management 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 RA Capital Management allocated the biggest weight to Eidos Therapeutics, Inc. (NASDAQ:EIDX), around 4.63% of its 13F portfolio. Opaleye Management is also relatively very bullish on the stock, dishing out 3.97 percent of its 13F equity portfolio to EIDX.

Now, key money managers were breaking ground themselves. Hillhouse Capital Management, managed by Lei Zhang, established the biggest position in Eidos Therapeutics, Inc. (NASDAQ:EIDX). Hillhouse Capital Management had $6.4 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also initiated a $6 million position during the quarter. The other funds with new positions in the stock are Christopher James's Partner Fund Management, David E. Shaw's D E Shaw, and Cliff Asness's AQR Capital Management.

Let's now review hedge fund activity in other stocks similar to Eidos Therapeutics, Inc. (NASDAQ:EIDX). We will take a look at IMAX Corporation (NYSE:IMAX), SciPlay Corporation (NASDAQ:SCPL), Denny's Corporation (NASDAQ:DENN), and Oceaneering International, Inc. (NYSE:OII). This group of stocks' market caps are similar to EIDX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IMAX,15,46829,3 SCPL,16,81812,0 DENN,20,221074,3 OII,19,191225,4 Average,17.5,135235,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $135 million. That figure was $186 million in EIDX's case. Denny's Corporation (NASDAQ:DENN) is the most popular stock in this table. On the other hand IMAX Corporation (NYSE:IMAX) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Eidos Therapeutics, Inc. (NASDAQ:EIDX) is even less popular than IMAX. Hedge funds clearly dropped the ball on EIDX as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on EIDX as the stock returned 56.6% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

Related Content