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In this article you are going to find out whether hedge funds think Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) has seen a decrease in support from the world's most elite money managers recently. RYTM was in 9 hedge funds' portfolios at the end of March. There were 10 hedge funds in our database with RYTM positions at the end of the previous quarter. Our calculations also showed that RYTM 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 58 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.
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Peter Kolchinsky of RA Capital Management[/caption]
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the top 15 defense contractors in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's take a look at the fresh hedge fund action surrounding Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM).
What does smart money think about Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM)?
Heading into the second quarter of 2020, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RYTM over the last 18 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, RA Capital Management was the largest shareholder of Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM), with a stake worth $82.5 million reported as of the end of September. Trailing RA Capital Management was Deerfield Management, which amassed a stake valued at $46.1 million. Baker Bros. Advisors, Rock Springs Capital Management, and Samsara BioCapital 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 RA Capital Management allocated the biggest weight to Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM), around 2.61% of its 13F portfolio. Samsara BioCapital is also relatively very bullish on the stock, dishing out 2.42 percent of its 13F equity portfolio to RYTM.
Because Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) has experienced declining sentiment from hedge fund managers, logic holds that there is a sect of fund managers that decided to sell off their positions entirely last quarter. Intriguingly, James A. Silverman's Opaleye Management said goodbye to the biggest position of the 750 funds watched by Insider Monkey, valued at close to $2.5 million in stock. Parvinder Thiara's fund, Athanor Capital, also dumped its stock, about $0.6 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds last quarter.
Let's check out hedge fund activity in other stocks similar to Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM). We will take a look at Re/Max Holdings Inc (NYSE:RMAX), OrthoPediatrics Corp. (NASDAQ:KIDS), Mr. Cooper Group Inc. (NASDAQ:COOP), and Nordic American Tankers Ltd (NYSE:NAT). This group of stocks' market caps match RYTM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RMAX,6,31947,-11 KIDS,7,43469,-4 COOP,19,177754,-4 NAT,12,25618,-2 Average,11,69697,-5.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $70 million. That figure was $186 million in RYTM's case. Mr. Cooper Group Inc. (NASDAQ:COOP) is the most popular stock in this table. On the other hand Re/Max Holdings Inc (NYSE:RMAX) is the least popular one with only 6 bullish hedge fund positions. Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) is not the least popular stock in this group but hedge fund interest is still below average. 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 13.4% in 2020 through June 22nd and still beat the market by 15.9 percentage points. A small number of hedge funds were also right about betting on RYTM as the stock returned 56.3% during the second quarter and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.