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Were Hedge Funds Right About Selling BioDelivery Sciences International, Inc. (BDSI)?

Abigail Fisher

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 due to various reasons. Nevertheless, the data show elite investors' consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETF by 4 percentage points so far this year. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at BioDelivery Sciences International, Inc. (NASDAQ:BDSI) from the perspective of those elite funds.

BioDelivery Sciences International, Inc. (NASDAQ:BDSI) has experienced a decrease in hedge fund sentiment recently. BDSI was in 16 hedge funds' portfolios at the end of June. There were 18 hedge funds in our database with BDSI positions at the end of the previous quarter. Our calculations also showed that BDSI 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.

5 Most Popular Stocks Among Hedge Funds

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

BDSI_oct2019

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 look at the new hedge fund action encompassing BioDelivery Sciences International, Inc. (NASDAQ:BDSI).

How have hedgies been trading BioDelivery Sciences International, Inc. (NASDAQ:BDSI)?

Heading into the third quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in BDSI over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Kamran Moghtaderi Eversept Partners

The largest stake in BioDelivery Sciences International, Inc. (NASDAQ:BDSI) was held by venBio Select Advisor, which reported holding $34.5 million worth of stock at the end of March. It was followed by Nantahala Capital Management with a $21.3 million position. Other investors bullish on the company included Broadfin Capital, Rubric Capital Management, and Adage Capital Management.

Since BioDelivery Sciences International, Inc. (NASDAQ:BDSI) has faced a decline in interest from the smart money, we can see that there were a few hedge funds that decided to sell off their positions entirely by the end of the second quarter. It's worth mentioning that Benjamin A. Smith's Laurion Capital Management dropped the biggest investment of the "upper crust" of funds watched by Insider Monkey, worth an estimated $3 million in stock, and Michael Gelband's ExodusPoint Capital was right behind this move, as the fund said goodbye to about $0.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds by the end of the second quarter.

Let's also examine hedge fund activity in other stocks similar to BioDelivery Sciences International, Inc. (NASDAQ:BDSI). We will take a look at CVR Partners LP (NYSE:UAN), CNB Financial Corporation (NASDAQ:CCNE), Digital Turbine Inc (NASDAQ:APPS), and Sprague Resources LP (NYSE:SRLP). This group of stocks' market valuations resemble BDSI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UAN,4,46491,-1 CCNE,2,27748,-3 APPS,11,17829,-4 SRLP,2,647,0 Average,4.75,23179,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 4.75 hedge funds with bullish positions and the average amount invested in these stocks was $23 million. That figure was $119 million in BDSI's case. Digital Turbine Inc (NASDAQ:APPS) is the most popular stock in this table. On the other hand CNB Financial Corporation (NASDAQ:CCNE) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks BioDelivery Sciences International, Inc. (NASDAQ:BDSI) is more popular among hedge funds. 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 BDSI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on BDSI were disappointed as the stock returned -9.5% 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 in Q3.

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

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