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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 Liquidia Corporation (NASDAQ:LQDA).
Is LQDA a good stock to buy now? Hedge funds were becoming less hopeful. The number of bullish hedge fund positions retreated by 6 lately. Liquidia Corporation (NASDAQ:LQDA) was in 10 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 16. Our calculations also showed that LQDA 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.
Nathan Fischel of DAFNA Capital Management
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 we're going to take a glance at the key hedge fund action regarding Liquidia Corporation (NASDAQ:LQDA).
Do Hedge Funds Think LQDA Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -38% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LQDA over the last 21 quarters. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Among these funds, Farallon Capital held the most valuable stake in Liquidia Corporation (NASDAQ:LQDA), which was worth $9.2 million at the end of the third quarter. On the second spot was Great Point Partners which amassed $5.9 million worth of shares. Millennium Management, DAFNA Capital Management, and Two Sigma Advisors 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 DAFNA Capital Management allocated the biggest weight to Liquidia Corporation (NASDAQ:LQDA), around 0.92% of its 13F portfolio. Great Point Partners is also relatively very bullish on the stock, dishing out 0.53 percent of its 13F equity portfolio to LQDA.
Due to the fact that Liquidia Corporation (NASDAQ:LQDA) has faced bearish sentiment from the smart money, logic holds that there exists a select few hedge funds that elected to cut their entire stakes last quarter. Intriguingly, James A. Silverman's Opaleye Management sold off the biggest stake of the "upper crust" of funds tracked by Insider Monkey, totaling about $3.4 million in stock, and Chuck Royce's Royce & Associates was right behind this move, as the fund dropped about $1.4 million worth. These moves are interesting, as total hedge fund interest fell by 6 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Liquidia Corporation (NASDAQ:LQDA) but similarly valued. These stocks are Overseas Shipholding Group, Inc. (NYSE:OSG), Flexsteel Industries, Inc. (NASDAQ:FLXS), Luna Innovations Incorporated (NASDAQ:LUNA), VOXX International Corp (NASDAQ:VOXX), Ocwen Financial Corporation (NYSE:OCN), Quantum Corporation (NASDAQ:QMCO), and Sify Technologies Limited (NASDAQ:SIFY). This group of stocks' market values match LQDA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OSG,11,39199,-1 FLXS,9,40282,-4 LUNA,11,26088,1 VOXX,7,35232,1 OCN,8,35212,-9 QMCO,7,4792,1 SIFY,2,582,0 Average,7.9,25912,-1.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.9 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $25 million in LQDA's case. Overseas Shipholding Group, Inc. (NYSE:OSG) is the most popular stock in this table. On the other hand Sify Technologies Limited (NASDAQ:SIFY) is the least popular one with only 2 bullish hedge fund positions. Liquidia Corporation (NASDAQ:LQDA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LQDA is 62.2. 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 32.9% in 2020 through December 8th and beat the market again by 16.2 percentage points. Unfortunately LQDA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LQDA were disappointed as the stock returned -40.4% since the end of September (through 12/8) 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.