How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) and determine whether hedge funds had an edge regarding this stock.
Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) investors should be aware of an increase in hedge fund sentiment recently. Our calculations also showed that KNSA isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). 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 58 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.
[caption id="attachment_736153" align="aligncenter" width="400"] Didric Cederholm of Lion Point Capital[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we're going to take a look at the key hedge fund action regarding Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA).
What have hedge funds been doing with Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA)?
At Q1's end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards KNSA over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) was held by Baker Bros. Advisors, which reported holding $43.3 million worth of stock at the end of September. It was followed by Consonance Capital Management with a $34.7 million position. Other investors bullish on the company included Hillhouse Capital Management, Vivo Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Consonance Capital Management allocated the biggest weight to Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA), around 2.58% of its 13F portfolio. Lion Point is also relatively very bullish on the stock, dishing out 2.03 percent of its 13F equity portfolio to KNSA.
As one would reasonably expect, specific money managers were leading the bulls' herd. Consonance Capital Management, managed by Mitchell Blutt, established the most outsized position in Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA). Consonance Capital Management had $34.7 million invested in the company at the end of the quarter. Didric Cederholm's Lion Point also initiated a $7.7 million position during the quarter. The only other fund with a brand new KNSA position is Neil Shahrestani's Ikarian Capital.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) but similarly valued. These stocks are DSP Group, Inc. (NASDAQ:DSPG), Enterprise Bancorp, Inc (NASDAQ:EBTC), Precision BioSciences, Inc. (NASDAQ:DTIL), and Tufin Software Technologies Ltd. (NYSE:TUFN). This group of stocks' market valuations are closest to KNSA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DSPG,14,53755,0 EBTC,1,1517,-3 DTIL,11,9639,1 TUFN,5,3312,-3 Average,7.75,17056,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $17 million. That figure was $149 million in KNSA's case. DSP Group, Inc. (NASDAQ:DSPG) is the most popular stock in this table. On the other hand Enterprise Bancorp, Inc (NASDAQ:EBTC) is the least popular one with only 1 bullish hedge fund positions. Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on KNSA as the stock returned 64.6% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Get real-time email alerts: Follow Kiniksa Pharmaceuticals Ltd. (NASDAQ:KNSA)
Disclosure: None. This article was originally published at Insider Monkey.