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Were Hedge Funds Right About Piling Into KalVista Pharmaceuticals, Inc. (KALV)?

Abigail Fisher

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) and determine whether hedge funds had an edge regarding this stock.

Is KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) a buy here? Hedge funds were betting on the stock. The number of bullish hedge fund positions rose by 4 in recent months. Our calculations also showed that KALV isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

If you'd ask most investors, hedge funds are assumed to be underperforming, outdated investment vehicles of the past. While there are greater than 8000 funds in operation today, Our experts choose to focus on the aristocrats of this club, about 850 funds. These money managers have their hands on the lion's share of all hedge funds' total asset base, and by tailing their matchless picks, Insider Monkey has found several investment strategies that have historically outstripped the market. Insider Monkey's flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Aaron Cowen Suvretta Capital
Aaron Cowen Suvretta Capital

Aaron Cowen of Suvretta Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we're going to view the recent hedge fund action encompassing KalVista Pharmaceuticals, Inc. (NASDAQ:KALV).

What have hedge funds been doing with KalVista Pharmaceuticals, Inc. (NASDAQ:KALV)?

At Q1's end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 29% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards KALV over the last 18 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) was held by Vivo Capital, which reported holding $11.3 million worth of stock at the end of September. It was followed by Ikarian Capital with a $7.2 million position. Other investors bullish on the company included Polar Capital, OrbiMed Advisors, and Adage Capital Management. In terms of the portfolio weights assigned to each position Vivo Capital allocated the biggest weight to KalVista Pharmaceuticals, Inc. (NASDAQ:KALV), around 1.02% of its 13F portfolio. DAFNA Capital Management is also relatively very bullish on the stock, dishing out 0.75 percent of its 13F equity portfolio to KALV.

Now, key hedge funds were leading the bulls' herd. Sphera Global Healthcare Fund, managed by Doron Breen and Mori Arkin, established the most valuable position in KalVista Pharmaceuticals, Inc. (NASDAQ:KALV). Sphera Global Healthcare Fund had $1.8 million invested in the company at the end of the quarter. James A. Silverman's Opaleye Management also made a $1.7 million investment in the stock during the quarter. The following funds were also among the new KALV investors: Aaron Cowen's Suvretta Capital Management, Ken Griffin's Citadel Investment Group, and Renaissance Technologies.

Let's check out hedge fund activity in other stocks similar to KalVista Pharmaceuticals, Inc. (NASDAQ:KALV). We will take a look at Soliton, Inc. (NASDAQ:SOLY), Silvercrest Asset Management Group Inc (NASDAQ:SAMG), Quad/Graphics, Inc. (NYSE:QUAD), and Steel Partners Holdings LP (NYSE:SPLP). This group of stocks' market values match KALV's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SOLY,1,96,1 SAMG,2,7990,0 QUAD,10,7792,-3 SPLP,3,10952,-1 Average,4,6708,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $7 million. That figure was $41 million in KALV's case. Quad/Graphics, Inc. (NYSE:QUAD) is the most popular stock in this table. On the other hand Soliton, Inc. (NASDAQ:SOLY) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on KALV as the stock returned 52.8% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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