World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients' money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It's not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It's also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.
Is KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) undervalued? Investors who are in the know are becoming more confident. The number of long hedge fund positions inched up by 4 lately. Our calculations also showed that KALV isn't among the 30 most popular stocks among hedge funds. KALV was in 19 hedge funds' portfolios at the end of the first quarter of 2019. There were 15 hedge funds in our database with KALV holdings at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
We're going to check out the fresh hedge fund action surrounding KalVista Pharmaceuticals, Inc. (NASDAQ:KALV).
How have hedgies been trading KalVista Pharmaceuticals, Inc. (NASDAQ:KALV)?
At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 27% from the fourth quarter of 2018. By comparison, 4 hedge funds held shares or bullish call options in KALV a year ago. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
More specifically, RA Capital Management was the largest shareholder of KalVista Pharmaceuticals, Inc. (NASDAQ:KALV), with a stake worth $41.2 million reported as of the end of March. Trailing RA Capital Management was Vivo Capital, which amassed a stake valued at $38.9 million. Polar Capital, Adage Capital Management, and Deerfield Management were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, key money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, initiated the most outsized position in KalVista Pharmaceuticals, Inc. (NASDAQ:KALV). Millennium Management had $2.8 million invested in the company at the end of the quarter. Samuel Isaly's OrbiMed Advisors also initiated a $2.6 million position during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace's Marshall Wace LLP, Michael Gelband's ExodusPoint Capital, and Michael Platt and William Reeves's BlueCrest Capital Mgmt..
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) but similarly valued. These stocks are Scholar Rock Holding Corporation (NASDAQ:SRRK), Teekay Offshore Partners L.P. (NYSE:TOO), Diamond Hill Investment Group, Inc. (NASDAQ:DHIL), and Establishment Labs Holdings Inc. (NASDAQ:ESTA). All of these stocks' market caps are closest to KALV's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SRRK,5,52685,1 TOO,8,11295,0 DHIL,9,40267,2 ESTA,9,64971,0 Average,7.75,42305,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $181 million in KALV's case. Diamond Hill Investment Group, Inc. (NASDAQ:DHIL) is the most popular stock in this table. On the other hand Scholar Rock Holding Corporation (NASDAQ:SRRK) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately KALV wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KALV were disappointed as the stock returned -28.5% during the same 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.