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Hedge Funds Have Never Been This Bullish On Castle Biosciences, Inc. (CSTL)

Nina Todic

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 750 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Castle Biosciences, Inc. (NASDAQ:CSTL), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Castle Biosciences, Inc. (NASDAQ:CSTL) shareholders have witnessed an increase in hedge fund interest recently. CSTL was in 12 hedge funds' portfolios at the end of September. There were 0 hedge funds in our database with CSTL holdings at the end of the previous quarter. Our calculations also showed that CSTL 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

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_221556" align="aligncenter" width="450"] Richard Driehaus of Driehaus Capital[/caption]

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. With all of this in mind let's analyze the key hedge fund action encompassing Castle Biosciences, Inc. (NASDAQ:CSTL).

What does smart money think about Castle Biosciences, Inc. (NASDAQ:CSTL)?

Heading into the fourth quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12 from the second quarter of 2019. By comparison, 0 hedge funds held shares or bullish call options in CSTL a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Castle Biosciences, Inc. (NASDAQ:CSTL) was held by Highland Capital Management, which reported holding $18.7 million worth of stock at the end of September. It was followed by Driehaus Capital with a $5.1 million position. Other investors bullish on the company included Alyeska Investment Group, Millennium Management, and Pura Vida Investments. In terms of the portfolio weights assigned to each position Highland Capital Management allocated the biggest weight to Castle Biosciences, Inc. (NASDAQ:CSTL), around 1.16% of its 13F portfolio. Pura Vida Investments is also relatively very bullish on the stock, dishing out 0.84 percent of its 13F equity portfolio to CSTL.

As one would reasonably expect, key money managers have been driving this bullishness. Highland Capital Management, managed by James Dondero, initiated the biggest position in Castle Biosciences, Inc. (NASDAQ:CSTL). Highland Capital Management had $18.7 million invested in the company at the end of the quarter. Richard Driehaus's Driehaus Capital also made a $5.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Anand Parekh's Alyeska Investment Group, Israel Englander's Millennium Management, and Efrem Kamen's Pura Vida Investments.

Let's also examine hedge fund activity in other stocks similar to Castle Biosciences, Inc. (NASDAQ:CSTL). We will take a look at Green Plains Partners LP (NASDAQ:GPP), Empresa Distribuidora y Comercializadora Norte Sociedad Anonima (NYSE:EDN), Marlin Business Services Corp. (NASDAQ:MRLN), and MiX Telematics Limited (NYSE:MIXT). This group of stocks' market valuations are closest to CSTL's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GPP,2,3131,0 EDN,3,1990,-1 MRLN,5,102733,2 MIXT,10,27871,2 Average,5,33931,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $34 million. That figure was $39 million in CSTL's case. MiX Telematics Limited (NYSE:MIXT) is the most popular stock in this table. On the other hand Green Plains Partners LP (NASDAQ:GPP) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Castle Biosciences, Inc. (NASDAQ:CSTL) 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. Hedge funds were also right about betting on CSTL as the stock returned 48.9% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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