Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Cara Therapeutics Inc (NASDAQ:CARA).
Hedge fund interest in Cara Therapeutics Inc (NASDAQ:CARA) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare CARA to other stocks including Hyster-Yale Materials Handling Inc (NYSE:HY), Carbonite Inc (NASDAQ:CARB), and Wabash National Corporation (NYSE:WNC) to get a better sense of its popularity. Our calculations also showed that CARA isn't among the 30 most popular stocks among hedge funds (see the video below). 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's analyze the key hedge fund action encompassing Cara Therapeutics Inc (NASDAQ:CARA).
Hedge fund activity in Cara Therapeutics Inc (NASDAQ:CARA)
At the end of the second quarter, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 5 hedge funds held shares or bullish call options in CARA a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Farallon Capital has the number one position in Cara Therapeutics Inc (NASDAQ:CARA), worth close to $20.5 million, comprising 0.2% of its total 13F portfolio. The second most bullish fund manager is Ken Griffin of Citadel Investment Group, with a $7.1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers that are bullish consist of Nathan Fischel's DAFNA Capital Management, Mark Kingdon's Kingdon Capital and Ken Griffin's Citadel Investment Group.
Seeing as Cara Therapeutics Inc (NASDAQ:CARA) has experienced declining sentiment from hedge fund managers, we can see that there lies a certain "tier" of money managers who were dropping their entire stakes last quarter. At the top of the heap, James A. Silverman's Opaleye Management cut the biggest stake of the 750 funds watched by Insider Monkey, valued at about $3.9 million in stock, and Steve Cohen's Point72 Asset Management was right behind this move, as the fund cut about $1.8 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Cara Therapeutics Inc (NASDAQ:CARA) but similarly valued. We will take a look at Hyster-Yale Materials Handling Inc (NYSE:HY), Carbonite Inc (NASDAQ:CARB), Wabash National Corporation (NYSE:WNC), and Natus Medical Inc (NASDAQ:BABY). All of these stocks' market caps are similar to CARA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HY,12,35777,1 CARB,19,125272,-1 WNC,15,63811,-1 BABY,22,93186,-2 Average,17,79512,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $39 million in CARA's case. Natus Medical Inc (NASDAQ:BABY) is the most popular stock in this table. On the other hand Hyster-Yale Materials Handling Inc (NYSE:HY) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Cara Therapeutics Inc (NASDAQ:CARA) is even less popular than HY. Hedge funds dodged a bullet by taking a bearish stance towards CARA. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CARA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CARA investors were disappointed as the stock returned -15% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.