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Was The Smart Money Right About Loading Up On Natera Inc (NTRA)?

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Asma UL Husna
·6 min read
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In this article we will take a look at whether hedge funds think Natera Inc (NASDAQ:NTRA) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Natera Inc (NASDAQ:NTRA) has seen an increase in hedge fund sentiment lately. Natera Inc (NASDAQ:NTRA) was in 35 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that NTRA 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.

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 56 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.

Justin John Ferayorni - Tamarack Capital Management
Justin John Ferayorni - Tamarack Capital Management

Justin John Ferayorni of Tamarack Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest telecom companies to identify fast growing companies in various industries. 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 we're going to check out the key hedge fund action regarding Natera Inc (NASDAQ:NTRA).

What have hedge funds been doing with Natera Inc (NASDAQ:NTRA)?

At Q2's end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in NTRA 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.

Among these funds, OrbiMed Advisors held the most valuable stake in Natera Inc (NASDAQ:NTRA), which was worth $161.6 million at the end of the third quarter. On the second spot was Bridger Management which amassed $72.5 million worth of shares. Point72 Asset Management, Millennium Management, and Driehaus Capital 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 Foresite Capital allocated the biggest weight to Natera Inc (NASDAQ:NTRA), around 9.26% of its 13F portfolio. Bridger Management is also relatively very bullish on the stock, earmarking 6.71 percent of its 13F equity portfolio to NTRA.

As one would reasonably expect, specific money managers have jumped into Natera Inc (NASDAQ:NTRA) headfirst. Adage Capital Management, managed by Phill Gross and Robert Atchinson, initiated the most valuable position in Natera Inc (NASDAQ:NTRA). Adage Capital Management had $18.7 million invested in the company at the end of the quarter. Zachary Miller's Parian Global Management also made a $10.7 million investment in the stock during the quarter. The other funds with brand new NTRA positions are Justin John Ferayorni's Tamarack Capital Management, Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management, and Jerome Pfund and Michael Sjostrom's Sectoral Asset Management.

Let's also examine hedge fund activity in other stocks similar to Natera Inc (NASDAQ:NTRA). These stocks are Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA), Janus Henderson Group plc (NYSE:JHG), Equity Commonwealth (NYSE:EQC), ICL Group Ltd. (NYSE:ICL), Graphic Packaging Holding Company (NYSE:GPK), ChemoCentryx Inc (NASDAQ:CCXI), and Amicus Therapeutics, Inc. (NASDAQ:FOLD). This group of stocks' market values are similar to NTRA's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MNTA,42,733308,6 JHG,30,215555,7 EQC,23,215349,3 ICL,5,6303,2 GPK,32,274367,-1 CCXI,31,701760,1 FOLD,32,1316185,4 Average,27.9,494690,3.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.9 hedge funds with bullish positions and the average amount invested in these stocks was $495 million. That figure was $634 million in NTRA's case. Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA) is the most popular stock in this table. On the other hand ICL Group Ltd. (NYSE:ICL) is the least popular one with only 5 bullish hedge fund positions. Natera Inc (NASDAQ:NTRA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NTRA is 78.5. 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 gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on NTRA as the stock returned 34.9% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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