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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Galera Therapeutics, Inc. (NASDAQ:GRTX).
Is GRTX a good stock to buy now? Galera Therapeutics, Inc. (NASDAQ:GRTX) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 7 hedge funds' portfolios at the end of the third quarter of 2020. Our calculations also showed that GRTX isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare GRTX to other stocks including Peabody Energy Corporation (NYSE:BTU), South Plains Financial, Inc. (NASDAQ:SPFI), and Red Violet, Inc. (NASDAQ:RDVT) to get a better sense of its popularity.
Video: 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 S&P 500 ETFs by 66 percentage points since March 2017 (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.
Peter Kolchinsky of RA Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 5 best cheap stocks to buy according to Ray Dalio to identify stocks with upside potential. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now we're going to take a look at the new hedge fund action regarding Galera Therapeutics, Inc. (NASDAQ:GRTX).
What have hedge funds been doing with Galera Therapeutics, Inc. (NASDAQ:GRTX)?
At third quarter's end, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2020. By comparison, 0 hedge funds held shares or bullish call options in GRTX a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Adage Capital Management was the largest shareholder of Galera Therapeutics, Inc. (NASDAQ:GRTX), with a stake worth $13.6 million reported as of the end of September. Trailing Adage Capital Management was RA Capital Management, which amassed a stake valued at $7.5 million. Rock Springs Capital Management, Sphera Global Healthcare Fund, and Perceptive Advisors 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 Sphera Global Healthcare Fund allocated the biggest weight to Galera Therapeutics, Inc. (NASDAQ:GRTX), around 0.42% of its 13F portfolio. RA Capital Management is also relatively very bullish on the stock, designating 0.14 percent of its 13F equity portfolio to GRTX.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Islet Management. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Millennium Management).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Galera Therapeutics, Inc. (NASDAQ:GRTX) but similarly valued. We will take a look at Peabody Energy Corporation (NYSE:BTU), South Plains Financial, Inc. (NASDAQ:SPFI), Red Violet, Inc. (NASDAQ:RDVT), Kezar Life Sciences, Inc. (NASDAQ:KZR), RBB Bancorp (NASDAQ:RBB), Cooper-Standard Holdings Inc (NYSE:CPS), and Westport Fuel Systems Inc. (NASDAQ:WPRT). All of these stocks' market caps resemble GRTX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BTU,20,99928,-3 SPFI,2,3871,1 RDVT,2,5446,-3 KZR,13,27196,-1 RBB,6,4972,-3 CPS,11,25448,-2 WPRT,8,14304,-2 Average,8.9,25881,-1.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.9 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $34 million in GRTX's case. Peabody Energy Corporation (NYSE:BTU) is the most popular stock in this table. On the other hand South Plains Financial, Inc. (NASDAQ:SPFI) is the least popular one with only 2 bullish hedge fund positions. Galera Therapeutics, Inc. (NASDAQ:GRTX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for GRTX is 48.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 31.6% in 2020 through December 2nd and still beat the market by 16 percentage points. A small number of hedge funds were also right about betting on GRTX as the stock returned 19.8% since the end of the third quarter (through 12/2) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.