Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).
Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 29 hedge funds' portfolios at the end of the third quarter of 2019. At the end of this article we will also compare ARNA to other stocks including Covanta Holding Corporation (NYSE:CVA), Alamos Gold Inc (NYSE:AGI), and Halozyme Therapeutics, Inc. (NASDAQ:HALO) to get a better sense of its popularity. Video: Click the image to 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 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_745225" align="aligncenter" width="473"] Noam Gottesman of GLG Partners[/caption]
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. We're going to take a look at the new hedge fund action surrounding Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).
How are hedge funds trading Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)?
At Q3's end, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 25 hedge funds with a bullish position in ARNA a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) was held by Partner Fund Management, which reported holding $104 million worth of stock at the end of September. It was followed by Perceptive Advisors with a $43.6 million position. Other investors bullish on the company included Alyeska Investment Group, Citadel Investment Group, and GLG Partners. In terms of the portfolio weights assigned to each position Prosight Capital allocated the biggest weight to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), around 4.14% of its portfolio. Partner Fund Management is also relatively very bullish on the stock, earmarking 3.07 percent of its 13F equity portfolio to ARNA.
Due to the fact that Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has faced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of hedge funds who were dropping their full holdings by the end of the third quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital sold off the biggest stake of the 750 funds followed by Insider Monkey, worth an estimated $4.7 million in stock, and Kamran Moghtaderi's Eversept Partners was right behind this move, as the fund dropped about $4.3 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) but similarly valued. We will take a look at Covanta Holding Corporation (NYSE:CVA), Alamos Gold Inc (NYSE:AGI), Halozyme Therapeutics, Inc. (NASDAQ:HALO), and Independent Bank Group Inc (NASDAQ:IBTX). This group of stocks' market valuations are closest to ARNA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVA,14,102739,-1 AGI,15,220502,3 HALO,24,154349,5 IBTX,12,100233,3 Average,16.25,144456,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $144 million. That figure was $293 million in ARNA's case. Halozyme Therapeutics, Inc. (NASDAQ:HALO) is the most popular stock in this table. On the other hand Independent Bank Group Inc (NASDAQ:IBTX) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is more popular among hedge funds. 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. Unfortunately ARNA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ARNA were disappointed as the stock returned 3.5% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.