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Was The Smart Money Right About Arena Pharmaceuticals, Inc. (ARNA)?

Abigail Fisher
·6 min read

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 Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).

Is Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) the right pick for your portfolio? Prominent investors were buying. The number of bullish hedge fund bets improved by 5 lately. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) was in 41 hedge funds' portfolios at the end of June. The all time high for this statistics is 36. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ARNA isn't among the 30 most popular stocks among hedge funds (click for Q2 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.

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 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 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.

Paul Marshall Marshall Wace
Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace LLP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Now let's view the recent hedge fund action surrounding Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).

How are hedge funds trading Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)?

At Q2's end, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the previous quarter. By comparison, 29 hedge funds held shares or bullish call options in ARNA 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.

Of the funds tracked by Insider Monkey, Alkeon Capital Management, managed by Panayotis Takis Sparaggis, holds the most valuable position in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). Alkeon Capital Management has a $109.5 million position in the stock, comprising 0.3% of its 13F portfolio. The second largest stake is held by Great Point Partners, led by Jeffrey Jay and David Kroin, holding a $82 million position; the fund has 6.6% of its 13F portfolio invested in the stock. Some other peers that are bullish include Joseph Edelman's Perceptive Advisors, Ken Griffin's Citadel Investment Group and Steve Cohen's Point72 Asset Management. In terms of the portfolio weights assigned to each position Great Point Partners allocated the biggest weight to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), around 6.55% of its 13F portfolio. Prosight Capital is also relatively very bullish on the stock, setting aside 6.14 percent of its 13F equity portfolio to ARNA.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls' herd. Avoro Capital Advisors (venBio Select Advisor), managed by Behzad Aghazadeh, assembled the largest position in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). Avoro Capital Advisors (venBio Select Advisor) had $59.8 million invested in the company at the end of the quarter. Farallon Capital also initiated a $56.7 million position during the quarter. The following funds were also among the new ARNA investors: Jerome Pfund and Michael Sjostrom's Sectoral Asset Management, Arsani William's Logos Capital, and Paul Marshall and Ian Wace's Marshall Wace LLP.

Let's check out hedge fund activity in other stocks similar to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). We will take a look at Medallia, Inc. (NYSE:MDLA), Black Hills Corporation (NYSE:BKH), Braskem SA (NYSE:BAK), Physicians Realty Trust (NYSE:DOC), Hamilton Lane Incorporated (NASDAQ:HLNE), Agree Realty Corporation (NYSE:ADC), and Regal Beloit Corporation (NYSE:RBC). This group of stocks' market valuations match ARNA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MDLA,18,257841,-2 BKH,22,182307,4 BAK,7,36296,1 DOC,15,106429,-1 HLNE,19,118594,10 ADC,16,300188,-5 RBC,22,258249,3 Average,17,179986,1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $180 million. That figure was $815 million in ARNA's case. Black Hills Corporation (NYSE:BKH) is the most popular stock in this table. On the other hand Braskem SA (NYSE:BAK) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is more popular among hedge funds. Our overall hedge fund sentiment score for ARNA is 90. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on ARNA as the stock returned 29.2% since the end of June (through 10/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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