Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 20% in 2019 (through September 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 24% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like WAVE Life Sciences Ltd. (NASDAQ:WVE).
WAVE Life Sciences Ltd. (NASDAQ:WVE) has seen a decrease in enthusiasm from smart money of late. WVE was in 20 hedge funds' portfolios at the end of June. There were 24 hedge funds in our database with WVE positions at the end of the previous quarter. Our calculations also showed that WVE isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_758434" align="aligncenter" width="450"] Nathan Fischel of DAFNA Capital[/caption]
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a peek at the fresh hedge fund action encompassing WAVE Life Sciences Ltd. (NASDAQ:WVE).
What does smart money think about WAVE Life Sciences Ltd. (NASDAQ:WVE)?
At the end of the second quarter, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from one quarter earlier. On the other hand, there were a total of 16 hedge funds with a bullish position in WVE a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Peter Kolchinsky's RA Capital Management has the biggest position in WAVE Life Sciences Ltd. (NASDAQ:WVE), worth close to $202.9 million, accounting for 10.9% of its total 13F portfolio. Sitting at the No. 2 spot is Redmile Group, managed by Jeremy Green, which holds a $71 million position; the fund has 2% of its 13F portfolio invested in the stock. Other peers with similar optimism comprise James E. Flynn's Deerfield Management, Roberto Mignone's Bridger Management and Nathan Fischel's DAFNA Capital Management.
Because WAVE Life Sciences Ltd. (NASDAQ:WVE) has witnessed a decline in interest from the smart money, it's easy to see that there lies a certain "tier" of money managers that slashed their entire stakes heading into Q3. Intriguingly, Christopher James's Partner Fund Management sold off the largest stake of all the hedgies monitored by Insider Monkey, worth about $35.1 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund cut about $2.3 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds heading into Q3.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as WAVE Life Sciences Ltd. (NASDAQ:WVE) but similarly valued. These stocks are Tupperware Brands Corporation (NYSE:TUP), Carrizo Oil & Gas, Inc. (NASDAQ:CRZO), Social Capital Hedosophia Holdings Corp. (NYSE:IPOA), and Washington Trust Bancorp, Inc. (NASDAQ:WASH). This group of stocks' market caps resemble WVE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TUP,17,135408,-6 CRZO,10,82451,-5 IPOA,23,315142,1 WASH,7,28822,3 Average,14.25,140456,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $140 million. That figure was $339 million in WVE's case. Social Capital Hedosophia Holdings Corp. (NYSE:IPOA) is the most popular stock in this table. On the other hand Washington Trust Bancorp, Inc. (NASDAQ:WASH) is the least popular one with only 7 bullish hedge fund positions. WAVE Life Sciences Ltd. (NASDAQ:WVE) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately WVE wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WVE were disappointed as the stock returned -21.3% during the third quarter 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.