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Were Hedge Funds Right About Dumping Castle Biosciences, Inc. (CSTL)?

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Last year we predicted the arrival of the first US recession since 2009 and we told in advance that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). 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 Castle Biosciences, Inc. (NASDAQ:CSTL).

Castle Biosciences, Inc. (NASDAQ:CSTL) was in 17 hedge funds' portfolios at the end of March. The all time high for this statistic is 21. CSTL investors should be aware of a decrease in enthusiasm from smart money lately. There were 21 hedge funds in our database with CSTL holdings at the end of December. Our calculations also showed that CSTL isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 115 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.

James Dondero Highland Capital Management
James Dondero Highland Capital Management

James Dondero of Highland Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Keeping this in mind we're going to take a glance at the new hedge fund action encompassing Castle Biosciences, Inc. (NASDAQ:CSTL).

Do Hedge Funds Think CSTL Is A Good Stock To Buy Now?

Heading into the second quarter of 2021, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the fourth quarter of 2020. On the other hand, there were a total of 9 hedge funds with a bullish position in CSTL a year ago. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

According to Insider Monkey's hedge fund database, Catherine D. Wood's ARK Investment Management has the most valuable position in Castle Biosciences, Inc. (NASDAQ:CSTL), worth close to $177.8 million, corresponding to 0.4% of its total 13F portfolio. On ARK Investment Management's heels is Matrix Capital Management, led by David Goel and Paul Ferri, holding a $68.5 million position; 0.8% of its 13F portfolio is allocated to the company. Other members of the smart money that are bullish comprise James Dondero's Highland Capital Management, Richard Driehaus's Driehaus Capital and Robert Joseph Caruso's Select Equity Group. In terms of the portfolio weights assigned to each position Highland Capital Management allocated the biggest weight to Castle Biosciences, Inc. (NASDAQ:CSTL), around 48.51% of its 13F portfolio. Matrix Capital Management is also relatively very bullish on the stock, designating 0.79 percent of its 13F equity portfolio to CSTL.

Seeing as Castle Biosciences, Inc. (NASDAQ:CSTL) has experienced declining sentiment from the smart money, it's safe to say that there was a specific group of funds who were dropping their positions entirely last quarter. It's worth mentioning that Steve Cohen's Point72 Asset Management dumped the largest stake of all the hedgies followed by Insider Monkey, totaling about $5.4 million in stock, and Matthew L Pinz's Pinz Capital was right behind this move, as the fund dropped about $3.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds last quarter.

Let's check out hedge fund activity in other stocks similar to Castle Biosciences, Inc. (NASDAQ:CSTL). We will take a look at Endo International plc (NASDAQ:ENDP), HeadHunter Group PLC (NASDAQ:HHR), Astec Industries, Inc. (NASDAQ:ASTE), Unisys Corporation (NYSE:UIS), Easterly Government Properties Inc (NYSE:DEA), PBF Energy Inc (NYSE:PBF), and Blink Charging Co. (NASDAQ:BLNK). This group of stocks' market values are closest to CSTL's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENDP,17,406138,4 HHR,7,5977,0 ASTE,12,109279,0 UIS,15,103349,-1 DEA,16,33210,6 PBF,13,85779,-5 BLNK,12,40892,1 Average,13.1,112089,0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.1 hedge funds with bullish positions and the average amount invested in these stocks was $112 million. That figure was $414 million in CSTL's case. Endo International plc (NASDAQ:ENDP) is the most popular stock in this table. On the other hand HeadHunter Group PLC (NASDAQ:HHR) is the least popular one with only 7 bullish hedge fund positions. Castle Biosciences, Inc. (NASDAQ:CSTL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CSTL is 75.3. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and beat the market again by 10.1 percentage points. Unfortunately CSTL wasn't nearly as popular as these 5 stocks and hedge funds that were betting on CSTL were disappointed as the stock returned 0.5% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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