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 Krystal Biotech, Inc. (NASDAQ:KRYS).
Is Krystal Biotech, Inc. (NASDAQ:KRYS) a healthy stock for your portfolio? Prominent investors are selling. The number of bullish hedge fund bets retreated by 1 in recent months. Our calculations also showed that KRYS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). KRYS was in 11 hedge funds' portfolios at the end of the third quarter of 2019. There were 12 hedge funds in our database with KRYS holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_341400" align="aligncenter" width="600"] Samuel Isaly of OrbiMed Advisors[/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 new hedge fund action encompassing Krystal Biotech, Inc. (NASDAQ:KRYS).
What does smart money think about Krystal Biotech, Inc. (NASDAQ:KRYS)?
Heading into the fourth quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. By comparison, 6 hedge funds held shares or bullish call options in KRYS a year ago. With hedge funds' capital changing hands, there exists a few notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Jeremy Green's Redmile Group has the number one position in Krystal Biotech, Inc. (NASDAQ:KRYS), worth close to $37.4 million, accounting for 1.3% of its total 13F portfolio. The second most bullish fund manager is Baker Bros. Advisors, managed by Julian Baker and Felix Baker, which holds a $35.9 million position; 0.2% of its 13F portfolio is allocated to the stock. Some other members of the smart money that are bullish comprise Alan Frazier's Frazier Healthcare Partners, Samuel Isaly's OrbiMed Advisors and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Frazier Healthcare Partners allocated the biggest weight to Krystal Biotech, Inc. (NASDAQ:KRYS), around 9.72% of its 13F portfolio. Knoll Capital Management is also relatively very bullish on the stock, designating 3.82 percent of its 13F equity portfolio to KRYS.
Seeing as Krystal Biotech, Inc. (NASDAQ:KRYS) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there were a few money managers that decided to sell off their entire stakes heading into Q4. It's worth mentioning that Steve Cohen's Point72 Asset Management sold off the biggest position of the "upper crust" of funds tracked by Insider Monkey, totaling about $4.1 million in stock, and Alec Litowitz and Ross Laser's Magnetar Capital was right behind this move, as the fund said goodbye to about $0.5 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks similar to Krystal Biotech, Inc. (NASDAQ:KRYS). These stocks are Globalstar, Inc. (NYSE:GSAT), Quanex Building Products Corporation (NYSE:NX), Genesco Inc. (NYSE:GCO), and QCR Holdings, Inc. (NASDAQ:QCRH). All of these stocks' market caps are closest to KRYS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GSAT,11,97484,-2 NX,17,60705,4 GCO,18,60081,1 QCRH,9,64083,1 Average,13.75,70588,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $159 million in KRYS's case. Genesco Inc. (NYSE:GCO) is the most popular stock in this table. On the other hand QCR Holdings, Inc. (NASDAQ:QCRH) is the least popular one with only 9 bullish hedge fund positions. Krystal Biotech, Inc. (NASDAQ:KRYS) is not the least popular stock in this group but hedge fund interest is still below 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. A small number of hedge funds were also right about betting on KRYS as the stock returned 62.7% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.