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While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Recro Pharma Inc (NASDAQ:REPH).
Is REPH a good stock to buy now? Hedge funds were selling. The number of bullish hedge fund positions were trimmed by 1 in recent months. Recro Pharma Inc (NASDAQ:REPH) was in 13 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 17. Our calculations also showed that REPH 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). There were 14 hedge funds in our database with REPH holdings at the end of June.
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 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.
David Harding of Winton 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 let's take a look at the new hedge fund action encompassing Recro Pharma Inc (NASDAQ:REPH).
Do Hedge Funds Think REPH Is A Good Stock To Buy Now?
At third quarter's end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in REPH a year ago. So, let's review 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, Renaissance Technologies, holds the most valuable position in Recro Pharma Inc (NASDAQ:REPH). Renaissance Technologies has a $3.1 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by Rubric Capital Management, led by David Rosen, holding a $2.3 million position; 0.2% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism comprise Anand Parekh's Alyeska Investment Group, D. E. Shaw's D E Shaw and Michael Kaufman's MAK Capital One. In terms of the portfolio weights assigned to each position MAK Capital One allocated the biggest weight to Recro Pharma Inc (NASDAQ:REPH), around 0.63% of its 13F portfolio. Newtyn Management is also relatively very bullish on the stock, dishing out 0.36 percent of its 13F equity portfolio to REPH.
Judging by the fact that Recro Pharma Inc (NASDAQ:REPH) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few funds that elected to cut their entire stakes in the third quarter. Interestingly, Jay Petschek and Steven Major's Corsair Capital Management dumped the largest stake of all the hedgies monitored by Insider Monkey, comprising close to $1.5 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund said goodbye to about $0.3 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 1 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Recro Pharma Inc (NASDAQ:REPH) but similarly valued. We will take a look at HighPoint Resources Corporation (NYSE:HPR), Income Opportunity Realty Investors, Inc. (NYSE:IOR), Streamline Health Solutions Inc. (NASDAQ:STRM), Natural Alternatives International, Inc. (NASDAQ:NAII), Hudson Technologies, Inc. (NASDAQ:HDSN), Pathfinder Bancorp, Inc. (NASDAQ:PBHC), and Lee Enterprises, Incorporated (NYSE:LEE). This group of stocks' market valuations are similar to REPH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HPR,8,2827,-7 IOR,1,325,1 STRM,6,18128,1 NAII,2,4323,1 HDSN,2,75,0 PBHC,1,2748,0 LEE,9,10784,-6 Average,4.1,5601,-1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.1 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $14 million in REPH's case. Lee Enterprises, Incorporated (NYSE:LEE) is the most popular stock in this table. On the other hand Income Opportunity Realty Investors, Inc. (NYSE:IOR) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Recro Pharma Inc (NASDAQ:REPH) is more popular among hedge funds. Our overall hedge fund sentiment score for REPH is 76.9. 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. 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 still beat the market by 16.2 percentage points. Unfortunately REPH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on REPH were disappointed as the stock returned 5.2% 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 in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.