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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Lumos Pharma, Inc. (NASDAQ:LUMO) to find out whether there were any major changes in hedge funds' views.
Is Lumos Pharma (LUMO) a good stock to buy now? LUMO shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds' portfolios at the end of September. Our calculations also showed that LUMO 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). At the end of this article we will also compare LUMO to other stocks including Babcock & Wilcox Enterprises Inc (NYSE:BW), Safeguard Scientifics, Inc (NYSE:SFE), and Natural Gas Services Group, Inc. (NYSE:NGS) to get a better sense of its popularity.
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 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 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 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.
Didric Cederholm of Lion Point Capital
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. Keeping this in mind let's view the recent hedge fund action regarding Lumos Pharma, Inc. (NASDAQ:LUMO).
Hedge fund activity in Lumos Pharma, Inc. (NASDAQ:LUMO)
Heading into the fourth quarter of 2020, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 6 hedge funds held shares or bullish call options in LUMO a year ago. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
The largest stake in Lumos Pharma, Inc. (NASDAQ:LUMO) was held by Deerfield Management, which reported holding $12.9 million worth of stock at the end of September. It was followed by Lion Point with a $5.6 million position. Other investors bullish on the company included Renaissance Technologies, Opaleye Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Lion Point allocated the biggest weight to Lumos Pharma, Inc. (NASDAQ:LUMO), around 1.23% of its 13F portfolio. Opaleye Management is also relatively very bullish on the stock, earmarking 0.65 percent of its 13F equity portfolio to LUMO.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Logos Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Opaleye Management).
Let's now review hedge fund activity in other stocks similar to Lumos Pharma, Inc. (NASDAQ:LUMO). These stocks are Babcock & Wilcox Enterprises Inc (NYSE:BW), Safeguard Scientifics, Inc (NYSE:SFE), Natural Gas Services Group, Inc. (NYSE:NGS), Mistras Group, Inc. (NYSE:MG), StoneMor Inc. (NYSE:STON), Community Bankers Trust Corp. (NASDAQ:ESXB), and HC2 Holdings Inc (NYSE:HCHC). This group of stocks' market values resemble LUMO's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BW,4,6173,-2 SFE,6,8901,-4 NGS,11,13926,1 MG,12,9811,1 STON,3,78903,-1 ESXB,4,8673,-2 HCHC,11,3880,-1 Average,7.3,18610,-1.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.3 hedge funds with bullish positions and the average amount invested in these stocks was $19 million. That figure was $26 million in LUMO's case. Mistras Group, Inc. (NYSE:MG) is the most popular stock in this table. On the other hand StoneMor Inc. (NYSE:STON) is the least popular one with only 3 bullish hedge fund positions. Lumos Pharma, Inc. (NASDAQ:LUMO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for LUMO is 24. 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 negative signal and 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 November 27th and surpassed the market again by 16.1 percentage points. Unfortunately LUMO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LUMO investors were disappointed as the stock returned 8.5% since the end of September (through 11/27) 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.