The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May and August as this time China pivoted and Trump put more pressure on China by increasing tariffs. Hedge funds' top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 24.4% through September 30th, vs. a gain of 20.4% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Denali Therapeutics Inc. (NASDAQ:DNLI), and what that likely means for the prospects of the company and its stock.
Denali Therapeutics Inc. (NASDAQ:DNLI) has experienced a decrease in support from the world's most elite money managers of late. DNLI was in 9 hedge funds' portfolios at the end of June. There were 10 hedge funds in our database with DNLI holdings at the end of the previous quarter. Our calculations also showed that DNLI 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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. Let's take a peek at the key hedge fund action surrounding Denali Therapeutics Inc. (NASDAQ:DNLI).
How have hedgies been trading Denali Therapeutics Inc. (NASDAQ:DNLI)?
Heading into the third quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. By comparison, 3 hedge funds held shares or bullish call options in DNLI a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Eli Casdin's Casdin Capital has the most valuable position in Denali Therapeutics Inc. (NASDAQ:DNLI), worth close to $8.3 million, accounting for 0.8% of its total 13F portfolio. The second most bullish fund manager is Citadel Investment Group, managed by Ken Griffin, which holds a $4 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism consist of Dmitry Balyasny's Balyasny Asset Management, D. E. Shaw's D E Shaw and Morris Mark's Mark Asset Management.
Seeing as Denali Therapeutics Inc. (NASDAQ:DNLI) has witnessed declining sentiment from the smart money, logic holds that there was a specific group of fund managers that decided to sell off their positions entirely last quarter. It's worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the largest position of all the hedgies watched by Insider Monkey, valued at about $1.2 million in stock. Israel Englander's fund, Millennium Management, also cut its stock, about $0.8 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds last quarter.
Let's also examine hedge fund activity in other stocks similar to Denali Therapeutics Inc. (NASDAQ:DNLI). These stocks are eHealth, Inc. (NASDAQ:EHTH), Shenandoah Telecommunications Company (NASDAQ:SHEN), Casella Waste Systems Inc. (NASDAQ:CWST), and The Cheesecake Factory Incorporated (NASDAQ:CAKE). This group of stocks' market valuations resemble DNLI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EHTH,26,454239,3 SHEN,18,107858,4 CWST,12,174012,-2 CAKE,25,192053,0 Average,20.25,232041,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $232 million. That figure was $21 million in DNLI's case. eHealth, Inc. (NASDAQ:EHTH) is the most popular stock in this table. On the other hand Casella Waste Systems Inc. (NASDAQ:CWST) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Denali Therapeutics Inc. (NASDAQ:DNLI) is even less popular than CWST. Hedge funds dodged a bullet by taking a bearish stance towards DNLI. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately DNLI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); DNLI investors were disappointed as the stock returned -26.2% 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 in 2019.
Disclosure: None. This article was originally published at Insider Monkey.