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At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Mersana Therapeutics, Inc. (NASDAQ:MRSN) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Mersana Therapeutics, Inc. (NASDAQ:MRSN) the right pick for your portfolio? Investors who are in the know were becoming hopeful. The number of long hedge fund positions advanced by 8 lately. Mersana Therapeutics, Inc. (NASDAQ:MRSN) was in 25 hedge funds' portfolios at the end of June. The all time high for this statistics is 17. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that MRSN isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
Kris Jenner of Rock Springs Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 to get excerpts of these letters in your inbox. With all of this in mind we're going to check out the key hedge fund action surrounding Mersana Therapeutics, Inc. (NASDAQ:MRSN).
What does smart money think about Mersana Therapeutics, Inc. (NASDAQ:MRSN)?
At the end of the second quarter, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 47% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MRSN over the last 20 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Avoro Capital Advisors (venBio Select Advisor) held the most valuable stake in Mersana Therapeutics, Inc. (NASDAQ:MRSN), which was worth $152.1 million at the end of the third quarter. On the second spot was Consonance Capital Management which amassed $138 million worth of shares. Sarissa Capital Management, OrbiMed Advisors, and Rock Springs 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 Consonance Capital Management allocated the biggest weight to Mersana Therapeutics, Inc. (NASDAQ:MRSN), around 8.27% of its 13F portfolio. Sarissa Capital Management is also relatively very bullish on the stock, earmarking 6.69 percent of its 13F equity portfolio to MRSN.
Consequently, some big names were breaking ground themselves. Avoro Capital Advisors (venBio Select Advisor), managed by Behzad Aghazadeh, initiated the most outsized position in Mersana Therapeutics, Inc. (NASDAQ:MRSN). Avoro Capital Advisors (venBio Select Advisor) had $152.1 million invested in the company at the end of the quarter. Mitchell Blutt's Consonance Capital Management also initiated a $138 million position during the quarter. The other funds with brand new MRSN positions are Michael Rockefeller and KarláKroeker's Woodline Partners, Greg Martinez's Parkman Healthcare Partners, and Joseph Samuels's Islet Management.
Let's now review hedge fund activity in other stocks similar to Mersana Therapeutics, Inc. (NASDAQ:MRSN). These stocks are Walker & Dunlop Inc. (NYSE:WD), Intercept Pharmaceuticals Inc (NASDAQ:ICPT), Spirit Airlines Incorporated (NASDAQ:SAVE), MakeMyTrip Limited (NASDAQ:MMYT), United Community Banks Inc (NASDAQ:UCBI), Ambarella Inc (NASDAQ:AMBA), and EverQuote, Inc. (NASDAQ:EVER). This group of stocks' market valuations are closest to MRSN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WD,18,73653,-1 ICPT,22,215147,3 SAVE,23,98598,-5 MMYT,10,28493,1 UCBI,17,25165,6 AMBA,27,171060,6 EVER,23,271845,0 Average,20,126280,1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $126 million. That figure was $582 million in MRSN's case. Ambarella Inc (NASDAQ:AMBA) is the most popular stock in this table. On the other hand MakeMyTrip Limited (NASDAQ:MMYT) is the least popular one with only 10 bullish hedge fund positions. Mersana Therapeutics, Inc. (NASDAQ:MRSN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MRSN is 84.1. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately MRSN wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MRSN were disappointed as the stock returned -16.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.