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At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) investors should pay attention to a decrease in hedge fund interest in recent months. Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) was in 19 hedge funds' portfolios at the end of June. The all time high for this statistics is 25. Our calculations also showed that VNDA 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.
Ken Griffin of Citadel Investment Group
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 are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. With all of this in mind we're going to review the recent hedge fund action regarding Vanda Pharmaceuticals Inc. (NASDAQ:VNDA).
Hedge fund activity in Vanda Pharmaceuticals Inc. (NASDAQ:VNDA)
At the end of the second quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in VNDA over the last 20 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
funds, Armistice Capital held the most valuable stake in Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), which was worth $54.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $48.4 million worth of shares. Palo Alto Investors, Citadel Investment Group, and D E Shaw 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 Palo Alto Investors allocated the biggest weight to Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), around 2.83% of its 13F portfolio. Armistice Capital is also relatively very bullish on the stock, setting aside 2.41 percent of its 13F equity portfolio to VNDA.
Because Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) has faced a decline in interest from hedge fund managers, logic holds that there lies a certain "tier" of hedge funds that elected to cut their entire stakes last quarter. At the top of the heap, Israel Englander's Millennium Management said goodbye to the biggest position of the "upper crust" of funds tracked by Insider Monkey, worth an estimated $2.9 million in stock. Guy Levy's fund, Soleus Capital, also sold off its stock, about $0.2 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 1 funds last quarter.
Let's check out hedge fund activity in other stocks similar to Vanda Pharmaceuticals Inc. (NASDAQ:VNDA). We will take a look at Vericel Corp (NASDAQ:VCEL), Impinj, Inc. (NASDAQ:PI), Boot Barn Holdings Inc (NYSE:BOOT), Kelly Services, Inc. (NASDAQ:KELYA), MGP Ingredients Inc (NASDAQ:MGPI), BELLUS Health Inc. (NASDAQ:BLU), and Monarch Casino & Resort, Inc. (NASDAQ:MCRI). This group of stocks' market values resemble VNDA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VCEL,17,97112,-1 PI,22,206995,4 BOOT,13,19466,-7 KELYA,11,11905,-2 MGPI,13,21567,2 BLU,17,141027,3 MCRI,14,75315,-1 Average,15.3,81912,-0.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.3 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $194 million in VNDA's case. Impinj, Inc. (NASDAQ:PI) is the most popular stock in this table. On the other hand Kelly Services, Inc. (NASDAQ:KELYA) is the least popular one with only 11 bullish hedge fund positions. Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VNDA is 63.2. 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 positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately VNDA wasn't nearly as popular as these 10 stocks and hedge funds that were betting on VNDA were disappointed as the stock returned -15.6% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.