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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) to find out whether it was one of their high conviction long-term ideas.
Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds' portfolios at the end of September. At the end of this article we will also compare CNST to other stocks including Taiwan Liposome Company, Ltd. (NASDAQ:TLC), Dyadic International, Inc. (NASDAQ:DYAI), and Anavex Life Sciences Corp. (NASDAQ:AVXL) to get a better sense of its popularity.
Video: Click the image to 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 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.
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Samuel Isaly of OrbiMed Advisors[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's go over the recent hedge fund action surrounding Constellation Pharmaceuticals, Inc. (NASDAQ:CNST).
How have hedgies been trading Constellation Pharmaceuticals, Inc. (NASDAQ:CNST)?
At Q3's end, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CNST over the last 17 quarters. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Casdin Capital was the largest shareholder of Constellation Pharmaceuticals, Inc. (NASDAQ:CNST), with a stake worth $9.8 million reported as of the end of September. Trailing Casdin Capital was Cormorant Asset Management, which amassed a stake valued at $7.8 million. OrbiMed Advisors, Hillhouse Capital Management, and P.A.W. Capital Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position P.A.W. Capital Partners allocated the biggest weight to Constellation Pharmaceuticals, Inc. (NASDAQ:CNST), around 1.29% of its 13F portfolio. Casdin Capital is also relatively very bullish on the stock, designating 0.98 percent of its 13F equity portfolio to CNST.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) but similarly valued. We will take a look at Taiwan Liposome Company, Ltd. (NASDAQ:TLC), Dyadic International, Inc. (NASDAQ:DYAI), Anavex Life Sciences Corp. (NASDAQ:AVXL), and Mackinac Financial Corporation (NASDAQ:MFNC). This group of stocks' market valuations are closest to CNST's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TLC,1,474,0 DYAI,2,6251,-1 AVXL,4,13051,-1 MFNC,5,13964,1 Average,3,8435,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 3 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $27 million in CNST's case. Mackinac Financial Corporation (NASDAQ:MFNC) is the most popular stock in this table. On the other hand Taiwan Liposome Company, Ltd. (NASDAQ:TLC) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) 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 CNST as the stock returned 620.7% 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.