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Do Hedge Funds Love Zynerba Pharmaceuticals Inc (ZYNE)?

Debasis Saha

We are still in an overall bull market and many stocks that smart money investors were piling into 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. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE).

Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) has experienced an increase in hedge fund sentiment lately. Our calculations also showed that ZYNE 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.

5 Most Popular Stocks Among Hedge Funds

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_258236" align="alignnone" width="600"] Ken Griffin of Citadel Investment Group[/caption]

Ken Griffin

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind we're going to check out the fresh hedge fund action regarding Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE).

How have hedgies been trading Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE)?

Heading into the fourth quarter of 2019, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from the previous quarter. On the other hand, there were a total of 8 hedge funds with a bullish position in ZYNE a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Is ZYNE A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey, George McCabe's Portolan Capital Management has the most valuable position in Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE), worth close to $5.9 million, corresponding to 0.7% of its total 13F portfolio. Sitting at the No. 2 spot is Sculptor Capital, with a $1.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions consist of Ken Griffin's Citadel Investment Group, Israel Englander's Millennium Management and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Portolan Capital Management allocated the biggest weight to Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE), around 0.66% of its 13F portfolio. Sculptor Capital is also relatively very bullish on the stock, earmarking 0.02 percent of its 13F equity portfolio to ZYNE.

With a general bullishness amongst the heavyweights, some big names have jumped into Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) headfirst. Millennium Management, managed by Israel Englander, created the biggest call position in Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE). Millennium Management had $1.6 million invested in the company at the end of the quarter. Cliff Asness's AQR Capital Management also initiated a $0.1 million position during the quarter.

Let's now take a look at hedge fund activity in other stocks similar to Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE). These stocks are AcelRx Pharmaceuticals Inc (NASDAQ:ACRX), Hi-Crush Inc. (NYSE:HCR), Ohio Valley Banc Corp. (NASDAQ:OVBC), and MainStreet Bancshares, Inc. (NASDAQ:MNSB). This group of stocks' market values resemble ZYNE's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ACRX,5,2657,-1 HCR,3,2694,0 OVBC,1,1839,0 MNSB,2,12983,-1 Average,2.75,5043,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 2.75 hedge funds with bullish positions and the average amount invested in these stocks was $5 million. That figure was $8 million in ZYNE's case. AcelRx Pharmaceuticals Inc (NASDAQ:ACRX) is the most popular stock in this table. On the other hand Ohio Valley Banc Corp. (NASDAQ:OVBC) is the least popular one with only 1 bullish hedge fund positions. Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) is not the most popular stock in this group but hedge fund interest is still above average. 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 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 ZYNE wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ZYNE were disappointed as the stock returned -16.3% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.

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