Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 34.7% compared to 26.2%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Hedge fund interest in Iterum Therapeutics plc (NASDAQ:ITRM) 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 ITRM to other stocks including Great Elm Capital Corporation (NASDAQ:GECC), Sequans Communications SA (NYSE:SQNS), and Idera Pharmaceuticals Inc (NASDAQ:IDRA) to get a better sense of its popularity.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_27676" align="aligncenter" width="355"] Israel Englander of Millennium Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the key hedge fund action regarding Iterum Therapeutics plc (NASDAQ:ITRM).
What have hedge funds been doing with Iterum Therapeutics plc (NASDAQ:ITRM)?
Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ITRM over the last 17 quarters. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Among these funds, Frazier Healthcare Partners held the most valuable stake in Iterum Therapeutics plc (NASDAQ:ITRM), which was worth $8.9 million at the end of the third quarter. On the second spot was Cormorant Asset Management which amassed $2.3 million worth of shares. Millennium Management was 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 Iterum Therapeutics plc (NASDAQ:ITRM), around 2.78% of its portfolio. Cormorant Asset Management is also relatively very bullish on the stock, dishing out 0.14 percent of its 13F equity portfolio to ITRM.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's also examine hedge fund activity in other stocks similar to Iterum Therapeutics plc (NASDAQ:ITRM). We will take a look at Great Elm Capital Corporation (NASDAQ:GECC), Sequans Communications SA (NYSE:SQNS), Idera Pharmaceuticals Inc (NASDAQ:IDRA), and PolarityTE, Inc. (NASDAQ:PTE). This group of stocks' market values resemble ITRM's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GECC,3,1592,-1 SQNS,4,14981,0 IDRA,8,18034,0 PTE,11,14461,1 Average,6.5,12267,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $11 million in ITRM's case. PolarityTE, Inc. (NASDAQ:PTE) is the most popular stock in this table. On the other hand Great Elm Capital Corporation (NASDAQ:GECC) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Iterum Therapeutics plc (NASDAQ:ITRM) is even less popular than GECC. Hedge funds dodged a bullet by taking a bearish stance towards ITRM. Our calculations showed that the top 20 most popular hedge fund stocks returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately ITRM wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ITRM investors were disappointed as the stock returned -66.4% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.