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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 Viking Therapeutics, Inc. (NASDAQ:VKTX).
Is VKTX a good stock to buy now? Investors who are in the know were becoming less hopeful. The number of bullish hedge fund bets fell by 2 lately. Viking Therapeutics, Inc. (NASDAQ:VKTX) was in 15 hedge funds' portfolios at the end of September. The all time high for this statistic is 27. Our calculations also showed that VKTX 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 17 hedge funds in our database with VKTX holdings at the end of June.
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.
Nathan Fischel of DAFNA 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 let's review the fresh hedge fund action encompassing Viking Therapeutics, Inc. (NASDAQ:VKTX).
Do Hedge Funds Think VKTX Is A Good Stock To Buy Now?
At Q3's end, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in VKTX a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
More specifically, Park West Asset Management was the largest shareholder of Viking Therapeutics, Inc. (NASDAQ:VKTX), with a stake worth $8.5 million reported as of the end of September. Trailing Park West Asset Management was Sio Capital, which amassed a stake valued at $4.1 million. DAFNA Capital Management, Baker Bros. Advisors, and Deerfield Management 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 DAFNA Capital Management allocated the biggest weight to Viking Therapeutics, Inc. (NASDAQ:VKTX), around 0.85% of its 13F portfolio. Sio Capital is also relatively very bullish on the stock, dishing out 0.82 percent of its 13F equity portfolio to VKTX.
Because Viking Therapeutics, Inc. (NASDAQ:VKTX) has experienced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there was a specific group of fund managers that elected to cut their entire stakes last quarter. It's worth mentioning that Doron Breen and Mori Arkin's Sphera Global Healthcare Fund said goodbye to the largest investment of all the hedgies followed by Insider Monkey, valued at an estimated $1.5 million in stock. Minhua Zhang's fund, Weld Capital Management, also dumped its stock, about $0.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds last quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Viking Therapeutics, Inc. (NASDAQ:VKTX) but similarly valued. These stocks are Clarus Corporation (NASDAQ:CLAR), Orchard Therapeutics plc (NASDAQ:ORTX), Viomi Technology Co., Ltd (NASDAQ:VIOT), KNOT Offshore Partners LP (NYSE:KNOP), D8 Holdings Corp. (NYSE:DEH), Kala Pharmaceuticals, Inc. (NASDAQ:KALA), and Univest Financial Corporation (NASDAQ:UVSP). All of these stocks' market caps resemble VKTX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CLAR,15,59380,0 ORTX,14,109000,-6 VIOT,5,21142,-1 KNOP,3,20830,-2 DEH,20,121167,20 KALA,18,142580,-1 UVSP,11,49515,-1 Average,12.3,74802,1.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.3 hedge funds with bullish positions and the average amount invested in these stocks was $75 million. That figure was $25 million in VKTX's case. D8 Holdings Corp. (NYSE:DEH) is the most popular stock in this table. On the other hand KNOT Offshore Partners LP (NYSE:KNOP) is the least popular one with only 3 bullish hedge fund positions. Viking Therapeutics, Inc. (NASDAQ:VKTX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VKTX is 55. 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 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on VKTX as the stock returned 15.3% since the end of Q3 (through 12/14) 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.