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While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Evelo Biosciences, Inc. (NASDAQ:EVLO).
Is Evelo Biosciences, Inc. (NASDAQ:EVLO) the right pick for your portfolio? Money managers are taking an optimistic view. The number of bullish hedge fund positions inched up by 3 in recent months. Our calculations also showed that EVLO 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.
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.
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Paul Marshall of Marshall Wace[/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. Keeping this in mind we're going to view the key hedge fund action regarding Evelo Biosciences, Inc. (NASDAQ:EVLO).
How have hedgies been trading Evelo Biosciences, Inc. (NASDAQ:EVLO)?
Heading into the fourth quarter of 2019, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 150% from one quarter earlier. On the other hand, there were a total of 1 hedge funds with a bullish position in EVLO a year ago. With hedgies' capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Sectoral Asset Management, managed by Jerome Pfund and Michael Sjostrom, holds the biggest position in Evelo Biosciences, Inc. (NASDAQ:EVLO). Sectoral Asset Management has a $4.5 million position in the stock, comprising 0.8% of its 13F portfolio. Sitting at the No. 2 spot is Samsara BioCapital, led by Srini Akkaraju and Michael Dybbs, holding a $1.4 million position; 0.9% of its 13F portfolio is allocated to the company. Some other peers that are bullish consist of Nathan Fischel's DAFNA Capital Management, Renaissance Technologies and Paul Marshall and Ian Wace's Marshall Wace. In terms of the portfolio weights assigned to each position Samsara BioCapital allocated the biggest weight to Evelo Biosciences, Inc. (NASDAQ:EVLO), around 0.94% of its 13F portfolio. Sectoral Asset Management is also relatively very bullish on the stock, dishing out 0.77 percent of its 13F equity portfolio to EVLO.
As aggregate interest increased, key hedge funds have jumped into Evelo Biosciences, Inc. (NASDAQ:EVLO) headfirst. DAFNA Capital Management, managed by Nathan Fischel, assembled the largest position in Evelo Biosciences, Inc. (NASDAQ:EVLO). DAFNA Capital Management had $0.1 million invested in the company at the end of the quarter. Renaissance Technologies also made a $0.1 million investment in the stock during the quarter. The only other fund with a brand new EVLO position is Paul Marshall and Ian Wace's Marshall Wace.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Evelo Biosciences, Inc. (NASDAQ:EVLO) but similarly valued. We will take a look at Graham Corporation (NYSE:GHM), DASAN Zhone Solutions, Inc. (NASDAQ:DZSI), BG Staffing Inc (NYSE:BGSF), and First Guaranty Bancshares, Inc. (NASDAQ:FGBI). This group of stocks' market caps are similar to EVLO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GHM,8,21270,1 DZSI,9,6452,3 BGSF,9,9131,1 FGBI,1,783,0 Average,6.75,9409,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $6 million in EVLO's case. DASAN Zhone Solutions, Inc. (NASDAQ:DZSI) is the most popular stock in this table. On the other hand First Guaranty Bancshares, Inc. (NASDAQ:FGBI) is the least popular one with only 1 bullish hedge fund positions. Evelo Biosciences, Inc. (NASDAQ:EVLO) 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 EVLO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); EVLO investors were disappointed as the stock returned -26.1% 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.