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Is KALA A Good Stock To Buy Now?

Debasis Saha
·6 min read

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks aren't doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to Kala Pharmaceuticals, Inc. (NASDAQ:KALA) changed recently.

Kala Pharmaceuticals, Inc. (NASDAQ:KALA) was in 18 hedge funds' portfolios at the end of September. The all time high for this statistic is 19. KALA investors should pay attention to a decrease in activity from the world's largest hedge funds of late. There were 19 hedge funds in our database with KALA holdings at the end of June. Our calculations also showed that KALA isn't among the 30 most popular stocks among hedge funds (click for Q3 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ken Griffin
Ken Griffin

Ken Griffin of Citadel Investment Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind let's take a peek at the new hedge fund action encompassing Kala Pharmaceuticals, Inc. (NASDAQ:KALA).

Do Hedge Funds Think KALA Is A Good Stock To Buy Now?

Heading into the fourth quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards KALA over the last 21 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is KALA A Good Stock To Buy?
Is KALA A Good Stock To Buy?

Among these funds, RA Capital Management held the most valuable stake in Kala Pharmaceuticals, Inc. (NASDAQ:KALA), which was worth $81.6 million at the end of the third quarter. On the second spot was OrbiMed Advisors which amassed $41 million worth of shares. Vivo Capital, Ikarian Capital, 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 Kala Pharmaceuticals, Inc. (NASDAQ:KALA), around 1.49% of its 13F portfolio. Samsara BioCapital is also relatively very bullish on the stock, setting aside 0.94 percent of its 13F equity portfolio to KALA.

Judging by the fact that Kala Pharmaceuticals, Inc. (NASDAQ:KALA) has experienced declining sentiment from hedge fund managers, we can see that there is a sect of funds who were dropping their entire stakes in the third quarter. Intriguingly, James A. Silverman's Opaleye Management said goodbye to the largest stake of the "upper crust" of funds watched by Insider Monkey, totaling close to $3.8 million in stock, and Chen Tianqiao's Shanda Asset Management was right behind this move, as the fund dropped about $0.5 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 1 funds in the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Kala Pharmaceuticals, Inc. (NASDAQ:KALA) but similarly valued. We will take a look at Univest Financial Corporation (NASDAQ:UVSP), Progenity, Inc. (NASDAQ:PROG), Triple-S Management Corp.(NYSE:GTS), First Mid Bancshares, Inc. (NASDAQ:FMBH), American Public Education, Inc. (NASDAQ:APEI), Consolidated Communications Holdings Inc (NASDAQ:CNSL), and ChannelAdvisor Corp (NYSE:ECOM). This group of stocks' market valuations resemble KALA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UVSP,11,49515,-1 PROG,7,6786,-3 GTS,11,87709,1 FMBH,3,2962,0 APEI,12,75333,-4 CNSL,15,24192,3 ECOM,19,62827,0 Average,11.1,44189,-0.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.1 hedge funds with bullish positions and the average amount invested in these stocks was $44 million. That figure was $143 million in KALA's case. ChannelAdvisor Corp (NYSE:ECOM) is the most popular stock in this table. On the other hand First Mid Bancshares, Inc. (NASDAQ:FMBH) is the least popular one with only 3 bullish hedge fund positions. Kala Pharmaceuticals, Inc. (NASDAQ:KALA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KALA is 79.3. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately KALA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KALA were disappointed as the stock returned 1.9% since the end of September (through 12/14) 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.

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Disclosure: None. This article was originally published at Insider Monkey.

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