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 (Recession is Imminent: We Need A Travel Ban NOW). 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 Verrica Pharmaceuticals Inc. (NASDAQ:VRCA).
Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) investors should be aware of a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that VRCA isn't among the 30 most popular stocks among hedge funds (click for Q1 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 44 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.
[caption id="attachment_341400" align="aligncenter" width="400"] Samuel Isaly of OrbiMed Advisors[/caption]
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, legendary investor Bill Miller told investors to sell 7 extremely popular recession stocks last month. So, we went through his list and recommended another stock with 100% upside potential instead. We interview hedge fund managers and ask them about their best ideas. You can watch our latest hedge fund manager interview here and find out the name of the large-cap healthcare stock that Sio Capital's Michael Castor expects to double. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to take a gander at the key hedge fund action surrounding Verrica Pharmaceuticals Inc. (NASDAQ:VRCA).
What have hedge funds been doing with Verrica Pharmaceuticals Inc. (NASDAQ:VRCA)?
At Q1's end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. On the other hand, there were a total of 4 hedge funds with a bullish position in VRCA a year ago. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) was held by Perceptive Advisors, which reported holding $37.3 million worth of stock at the end of September. It was followed by OrbiMed Advisors with a $16.2 million position. The only other hedge fund that is bullish on the company was Dorset Management.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Renaissance Technologies. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified VRCA as a viable investment and initiated a position in the stock.
Let's now review hedge fund activity in other stocks similar to Verrica Pharmaceuticals Inc. (NASDAQ:VRCA). These stocks are Astronics Corporation (NASDAQ:ATRO), Peabody Energy Corporation (NYSE:BTU), Cambridge Bancorp (NASDAQ:CATC), and Summit Financial Group, Inc. (NASDAQ:SMMF). This group of stocks' market values are similar to VRCA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATRO,15,63536,-1 BTU,25,129012,-4 CATC,9,15932,2 SMMF,2,6045,-1 Average,12.75,53631,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $54 million in VRCA's case. Peabody Energy Corporation (NYSE:BTU) is the most popular stock in this table. On the other hand Summit Financial Group, Inc. (NASDAQ:SMMF) is the least popular one with only 2 bullish hedge fund positions. Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) 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 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 7.9% in 2020 through May 22nd and surpassed the market by 15.6 percentage points. Unfortunately VRCA wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); VRCA investors were disappointed as the stock returned 1.9% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Disclosure: None. This article was originally published at Insider Monkey.