We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds' top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 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 Heron Therapeutics Inc (NASDAQ:HRTX).
Heron Therapeutics Inc (NASDAQ:HRTX) investors should be aware of a decrease in hedge fund sentiment lately. Our calculations also showed that HRTX 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.
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 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 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.
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. We're going to view the key hedge fund action encompassing Heron Therapeutics Inc (NASDAQ:HRTX).
What have hedge funds been doing with Heron Therapeutics Inc (NASDAQ:HRTX)?
At the end of the second quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -42% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HRTX over the last 16 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Baker Bros. Advisors, managed by Julian Baker and Felix Baker, holds the largest position in Heron Therapeutics Inc (NASDAQ:HRTX). Baker Bros. Advisors has a $111.9 million position in the stock, comprising 0.8% of its 13F portfolio. Sitting at the No. 2 spot is Tang Capital Management, managed by Kevin C. Tang, which holds a $106.8 million position; 14.4% of its 13F portfolio is allocated to the stock. Some other members of the smart money that are bullish comprise Roberto Mignone's Bridger Management, James Dondero's Highland Capital Management and D. E. Shaw's D E Shaw.
Since Heron Therapeutics Inc (NASDAQ:HRTX) has experienced declining sentiment from the smart money, logic holds that there lies a certain "tier" of money managers who sold off their full holdings heading into Q3. At the top of the heap, David Rosen's Rubric Capital Management sold off the largest investment of the 750 funds tracked by Insider Monkey, worth an estimated $36.7 million in stock, and Samuel Isaly's OrbiMed Advisors was right behind this move, as the fund dumped about $26.1 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 13 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Heron Therapeutics Inc (NASDAQ:HRTX) but similarly valued. We will take a look at G-III Apparel Group, Ltd. (NASDAQ:GIII), Cloudera, Inc. (NYSE:CLDR), Papa John's International, Inc. (NASDAQ:PZZA), and James River Group Holdings Ltd (NASDAQ:JRVR). This group of stocks' market values resemble HRTX's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GIII,13,74478,-5 CLDR,25,129316,-7 PZZA,22,332227,0 JRVR,10,40073,-2 Average,17.5,144024,-3.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $144 million. That figure was $400 million in HRTX's case. Cloudera, Inc. (NYSE:CLDR) is the most popular stock in this table. On the other hand James River Group Holdings Ltd (NASDAQ:JRVR) is the least popular one with only 10 bullish hedge fund positions. Heron Therapeutics Inc (NASDAQ:HRTX) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately HRTX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HRTX were disappointed as the stock returned -0.5% 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 this year.
Disclosure: None. This article was originally published at Insider Monkey.