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Amid an overall bull market, many stocks that smart money investors were collectively bullish on 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. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Akero Therapeutics, Inc. (NASDAQ:AKRO) was in 10 hedge funds' portfolios at the end of September. AKRO investors should pay attention to a decrease in hedge fund sentiment lately. There were 15 hedge funds in our database with AKRO holdings at the end of the previous quarter. Our calculations also showed that AKRO 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.
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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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Lei Zhang of Hillhouse 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. Let's take a gander at the latest hedge fund action regarding Akero Therapeutics, Inc. (NASDAQ:AKRO).
What does smart money think about Akero Therapeutics, Inc. (NASDAQ:AKRO)?
At Q3's end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in AKRO over the last 17 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
Among these funds, Redmile Group held the most valuable stake in Akero Therapeutics, Inc. (NASDAQ:AKRO), which was worth $26.5 million at the end of the third quarter. On the second spot was Hillhouse Capital Management which amassed $17 million worth of shares. Cormorant Asset Management, Adage Capital Management, and Alkeon Capital 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 Biotechnology Value Fund allocated the biggest weight to Akero Therapeutics, Inc. (NASDAQ:AKRO), around 1.13% of its 13F portfolio. Cormorant Asset Management is also relatively very bullish on the stock, dishing out 1.03 percent of its 13F equity portfolio to AKRO.
Judging by the fact that Akero Therapeutics, Inc. (NASDAQ:AKRO) has witnessed bearish sentiment from the smart money, we can see that there exists a select few fund managers that slashed their positions entirely in the third quarter. It's worth mentioning that Farallon Capital dumped the biggest position of the 750 funds monitored by Insider Monkey, totaling close to $2.9 million in stock. Anand Parekh's fund, Alyeska Investment Group, also said goodbye to its stock, about $1.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 5 funds in the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Akero Therapeutics, Inc. (NASDAQ:AKRO) but similarly valued. These stocks are Intellia Therapeutics, Inc. (NASDAQ:NTLA), Customers Bancorp Inc (NYSE:CUBI), National CineMedia, Inc. (NASDAQ:NCMI), and Dorchester Minerals LP (NASDAQ:DMLP). This group of stocks' market valuations are closest to AKRO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NTLA,11,13017,-1 CUBI,12,47860,0 NCMI,17,52383,1 DMLP,7,40449,0 Average,11.75,38427,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $104 million in AKRO's case. National CineMedia, Inc. (NASDAQ:NCMI) is the most popular stock in this table. On the other hand Dorchester Minerals LP (NASDAQ:DMLP) is the least popular one with only 7 bullish hedge fund positions. Akero Therapeutics, Inc. (NASDAQ:AKRO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 AKRO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AKRO investors were disappointed as the stock returned -13.5% 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.