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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Aurinia Pharmaceuticals Inc (NASDAQ:AUPH) and determine whether hedge funds had an edge regarding this stock.
Is Aurinia Pharmaceuticals Inc (NASDAQ:AUPH) a buy right now? Hedge funds were taking a bullish view. The number of long hedge fund bets advanced by 1 in recent months. Aurinia Pharmaceuticals Inc (NASDAQ:AUPH) was in 29 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 28. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that AUPH isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
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 S&P 500 ETFs by more than 56 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Kamran Moghtaderi of Eversept Partners
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now we're going to take a gander at the key hedge fund action surrounding Aurinia Pharmaceuticals Inc (NASDAQ:AUPH).
How are hedge funds trading Aurinia Pharmaceuticals Inc (NASDAQ:AUPH)?
At Q2's end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AUPH over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Healthcor Management LP held the most valuable stake in Aurinia Pharmaceuticals Inc (NASDAQ:AUPH), which was worth $154.4 million at the end of the third quarter. On the second spot was Consonance Capital Management which amassed $75.1 million worth of shares. Point72 Asset Management, Baker Bros. Advisors, and Avoro Capital Advisors (venBio Select Advisor) 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 Healthcor Management LP allocated the biggest weight to Aurinia Pharmaceuticals Inc (NASDAQ:AUPH), around 6.47% of its 13F portfolio. Consonance Capital Management is also relatively very bullish on the stock, earmarking 4.5 percent of its 13F equity portfolio to AUPH.
Now, key hedge funds were leading the bulls' herd. Eversept Partners, managed by Kamran Moghtaderi, created the most valuable position in Aurinia Pharmaceuticals Inc (NASDAQ:AUPH). Eversept Partners had $8.9 million invested in the company at the end of the quarter. Lawrence Hawkins's Prosight Capital also made a $1.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Thomas Bailard's Bailard Inc, Benjamin A. Smith's Laurion Capital Management, and Paul Marshall and Ian Wace's Marshall Wace LLP.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Aurinia Pharmaceuticals Inc (NASDAQ:AUPH) but similarly valued. We will take a look at Washington Real Estate Investment Trust (NYSE:WRE), Atlantic Union Bankshares Corporation (NASDAQ:AUB), Magellan Health Inc (NASDAQ:MGLN), Healthcare Services Group, Inc. (NASDAQ:HCSG), International Game Technology PLC (NYSE:IGT), Olin Corporation (NYSE:OLN), and Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (NASDAQ:OMAB). This group of stocks' market valuations match AUPH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WRE,8,74114,3 AUB,12,17918,2 MGLN,23,419029,8 HCSG,27,126575,7 IGT,23,96618,-2 OLN,33,448219,0 OMAB,4,34250,0 Average,18.6,173818,2.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.6 hedge funds with bullish positions and the average amount invested in these stocks was $174 million. That figure was $492 million in AUPH's case. Olin Corporation (NYSE:OLN) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (NASDAQ:OMAB) is the least popular one with only 4 bullish hedge fund positions. Aurinia Pharmaceuticals Inc (NASDAQ:AUPH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AUPH is 79.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 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 23.8% in 2020 through September 14th and beat the market by 17.6 percentage points. Unfortunately AUPH wasn't nearly as popular as these 10 stocks and hedge funds that were betting on AUPH were disappointed as the stock returned -8% during the same time 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.