We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Kezar Life Sciences, Inc. (NASDAQ:KZR).
Kezar Life Sciences, Inc. (NASDAQ:KZR) has seen a decrease in enthusiasm from smart money lately. KZR was in 8 hedge funds' portfolios at the end of September. There were 10 hedge funds in our database with KZR holdings at the end of the previous quarter. Our calculations also showed that KZR 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_673876" align="aligncenter" width="473"] John Overdeck of Two Sigma 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 analyze the latest hedge fund action regarding Kezar Life Sciences, Inc. (NASDAQ:KZR).
What have hedge funds been doing with Kezar Life Sciences, Inc. (NASDAQ:KZR)?
Heading into the fourth quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the second quarter of 2019. By comparison, 7 hedge funds held shares or bullish call options in KZR a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Cormorant Asset Management held the most valuable stake in Kezar Life Sciences, Inc. (NASDAQ:KZR), which was worth $3 million at the end of the third quarter. On the second spot was Frazier Healthcare Partners which amassed $1.5 million worth of shares. Renaissance Technologies, Citadel Investment Group, and Two Sigma Advisors 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 Frazier Healthcare Partners allocated the biggest weight to Kezar Life Sciences, Inc. (NASDAQ:KZR), around 0.48% of its 13F portfolio. Cormorant Asset Management is also relatively very bullish on the stock, setting aside 0.19 percent of its 13F equity portfolio to KZR.
Judging by the fact that Kezar Life Sciences, Inc. (NASDAQ:KZR) has witnessed falling interest from the aggregate hedge fund industry, it's safe to say that there were a few hedgies who sold off their entire stakes in the third quarter. It's worth mentioning that Oleg Nodelman's EcoR1 Capital cut the largest stake of the 750 funds monitored by Insider Monkey, worth an estimated $4.5 million in stock, and Brian Ashford-Russell and Tim Woolley's Polar Capital was right behind this move, as the fund said goodbye to about $1.2 million worth. These moves are interesting, as aggregate hedge fund interest fell by 2 funds in the third quarter.
Let's go over hedge fund activity in other stocks similar to Kezar Life Sciences, Inc. (NASDAQ:KZR). These stocks are ARC Document Solutions Inc (NYSE:ARC), Crown Crafts, Inc. (NASDAQ:CRWS), Kentucky First Federal Bancorp (NASDAQ:KFFB), and Manhattan Bridge Capital, Inc (NASDAQ:LOAN). This group of stocks' market valuations are similar to KZR's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ARC,8,8213,2 CRWS,8,7282,3 KFFB,1,512,0 LOAN,1,1269,-1 Average,4.5,4319,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $4 million. That figure was $6 million in KZR's case. ARC Document Solutions Inc (NYSE:ARC) is the most popular stock in this table. On the other hand Kentucky First Federal Bancorp (NASDAQ:KFFB) is the least popular one with only 1 bullish hedge fund positions. Kezar Life Sciences, Inc. (NASDAQ:KZR) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 KZR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KZR were disappointed as the stock returned -20.4% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.