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Were Hedge Funds Right About Phathom Pharmaceuticals, Inc. (PHAT)?

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Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks initially suffered the most but many of these stocks delivered strong returns since November and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment towards Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT) changed recently.

Is Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT) a healthy stock for your portfolio? Hedge funds were in an optimistic mood. The number of bullish hedge fund bets increased by 3 lately. Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT) was in 17 hedge funds' portfolios at the end of March. The all time high for this statistic was previously 14. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that PHAT isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

At the moment there are a lot of metrics market participants put to use to appraise stocks. Some of the most underrated metrics are hedge fund and insider trading sentiment. We have shown that, historically, those who follow the top picks of the best hedge fund managers can trounce the broader indices by a very impressive amount (see the details here). Also, our monthly newsletter's portfolio of long stock picks returned 206.8% since March 2017 (through May 2021) and beat the S&P 500 Index by more than 115 percentage points. You can download a sample issue of this newsletter on our website .

Peter Kolchinsky of RA 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 let's take a glance at the latest hedge fund action regarding Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT).

Do Hedge Funds Think PHAT 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 were long this stock, a change of 21% from one quarter earlier. By comparison, 6 hedge funds held shares or bullish call options in PHAT a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, Frazier Healthcare Partners was the largest shareholder of Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT), with a stake worth $218.9 million reported as of the end of March. Trailing Frazier Healthcare Partners was RA Capital Management, which amassed a stake valued at $117 million. Greenspring Associates, CaaS Capital, and Rhenman & Partners Asset 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 Frazier Healthcare Partners allocated the biggest weight to Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT), around 17.56% of its 13F portfolio. Greenspring Associates is also relatively very bullish on the stock, earmarking 10.78 percent of its 13F equity portfolio to PHAT.

Now, specific money managers have jumped into Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT) headfirst. Adage Capital Management, managed by Phill Gross and Robert Atchinson, established the most valuable position in Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT). Adage Capital Management had $3.1 million invested in the company at the end of the quarter. Michael Rockefeller and KarláKroeker's Woodline Partners also made a $1.6 million investment in the stock during the quarter. The other funds with brand new PHAT positions are John Overdeck and David Siegel's Two Sigma Advisors, Greg Martinez's Parkman Healthcare Partners, and Renaissance Technologies.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT) but similarly valued. We will take a look at Atrion Corporation (NASDAQ:ATRI), Inogen Inc (NASDAQ:INGN), Kraton Corporation (NYSE:KRA), Redwood Trust, Inc. (NYSE:RWT), OFG Bancorp (NYSE:OFG), Loral Space & Communications Inc (NASDAQ:LORL), and RPC, Inc. (NYSE:RES). All of these stocks' market caps match PHAT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATRI,8,50464,0 INGN,12,38487,-9 KRA,20,140860,2 RWT,18,69547,-4 OFG,10,60051,2 LORL,14,432461,-3 RES,14,32492,-3 Average,13.7,117766,-2.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.7 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $380 million in PHAT's case. Kraton Corporation (NYSE:KRA) is the most popular stock in this table. On the other hand Atrion Corporation (NASDAQ:ATRI) is the least popular one with only 8 bullish hedge fund positions. Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PHAT is 75.5. 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 PHAT wasn't nearly as popular as these 5 stocks and hedge funds that were betting on PHAT were disappointed as the stock returned -13.2% 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.