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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Vaxcyte, Inc. (NASDAQ:PCVX).
Is PCVX a good stock to buy now? Vaxcyte, Inc. (NASDAQ:PCVX) has experienced a decrease in hedge fund sentiment lately. Vaxcyte, Inc. (NASDAQ:PCVX) was in 10 hedge funds' portfolios at the end of September. The all time high for this statistics is 12. Our calculations also showed that PCVX 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Peter Kolchinsky of RA 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. Keeping this in mind we're going to analyze the fresh hedge fund action regarding Vaxcyte, Inc. (NASDAQ:PCVX).
Do Hedge Funds Think PCVX Is A Good Stock To Buy Now?
At third quarter's end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in PCVX a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Peter Kolchinsky's RA Capital Management has the biggest position in Vaxcyte, Inc. (NASDAQ:PCVX), worth close to $260.9 million, amounting to 4.8% of its total 13F portfolio. The second most bullish fund manager is Alan Frazier of Frazier Healthcare Partners, with a $114 million position; 10.2% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions consist of Joseph Edelman's Perceptive Advisors, Samuel Isaly's OrbiMed Advisors and James A. Silverman's Opaleye Management. In terms of the portfolio weights assigned to each position Frazier Healthcare Partners allocated the biggest weight to Vaxcyte, Inc. (NASDAQ:PCVX), around 10.24% of its 13F portfolio. RA Capital Management is also relatively very bullish on the stock, earmarking 4.77 percent of its 13F equity portfolio to PCVX.
Seeing as Vaxcyte, Inc. (NASDAQ:PCVX) has witnessed a decline in interest from the entirety of the hedge funds we track, we can see that there were a few hedge funds that decided to sell off their entire stakes by the end of the third quarter. At the top of the heap, Arsani William's Logos Capital dropped the largest position of all the hedgies watched by Insider Monkey, comprising an estimated $14.4 million in stock, and Michael Rockefeller and KarláKroeker's Woodline Partners was right behind this move, as the fund said goodbye to about $0.7 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Vaxcyte, Inc. (NASDAQ:PCVX) but similarly valued. These stocks are Vonage Holdings Corp. (NASDAQ:VG), Home Bancshares, Inc. (Conway, AR) (NASDAQ:HOMB), Brighthouse Financial, Inc. (NASDAQ:BHF), Acushnet Holdings Corp. (NYSE:GOLF), Option Care Health, Inc. (NASDAQ:OPCH), Evertec Inc (NYSE:EVTC), and NuVasive, Inc. (NASDAQ:NUVA). This group of stocks' market valuations are closest to PCVX's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VG,36,368753,6 HOMB,14,32750,0 BHF,26,296716,-8 GOLF,12,35383,1 OPCH,18,138384,7 EVTC,21,316649,3 NUVA,26,335263,-7 Average,21.9,217700,0.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.9 hedge funds with bullish positions and the average amount invested in these stocks was $218 million. That figure was $474 million in PCVX's case. Vonage Holdings Corp. (NASDAQ:VG) is the most popular stock in this table. On the other hand Acushnet Holdings Corp. (NYSE:GOLF) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Vaxcyte, Inc. (NASDAQ:PCVX) is even less popular than GOLF. Our overall hedge fund sentiment score for PCVX is 28. 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. Hedge funds dodged a bullet by taking a bearish stance towards PCVX. Our calculations showed that the top 20 most popular hedge fund stocks 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 but managed to beat the market again by 16.2 percentage points. Unfortunately PCVX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); PCVX investors were disappointed as the stock returned -33.6% since the end of the third quarter (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 most of these stocks already outperformed the market so far in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.