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Were Hedge Funds Right About Selling Prothena Corporation plc (PRTA)?

Debasis Saha

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 Prothena Corporation plc (NASDAQ:PRTA) and determine whether hedge funds had an edge regarding this stock.

Is Prothena Corporation plc (NASDAQ:PRTA) worth your attention right now? Investors who are in the know were taking a pessimistic view. The number of bullish hedge fund positions retreated by 3 recently. Our calculations also showed that PRTA 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). PRTA was in 20 hedge funds' portfolios at the end of the first quarter of 2020. There were 23 hedge funds in our database with PRTA holdings at the end of the previous quarter. Video: 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 a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Driehaus of Driehaus Capital

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 the world 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 let's take a look at the recent hedge fund action surrounding Prothena Corporation plc (NASDAQ:PRTA).

How have hedgies been trading Prothena Corporation plc (NASDAQ:PRTA)?

Heading into the second quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PRTA over the last 18 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

Is PRTA A Good Stock To Buy?
Is PRTA A Good Stock To Buy?

According to Insider Monkey's hedge fund database, Oleg Nodelman's EcoR1 Capital has the largest position in Prothena Corporation plc (NASDAQ:PRTA), worth close to $100.9 million, accounting for 10.5% of its total 13F portfolio. Coming in second is OrbiMed Advisors, managed by Samuel Isaly, which holds a $31.1 million position; 0.5% of its 13F portfolio is allocated to the company. Remaining peers that hold long positions encompass Jeffrey Jay and David Kroin's Great Point Partners, William Leland Edwards's Palo Alto Investors and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position EcoR1 Capital allocated the biggest weight to Prothena Corporation plc (NASDAQ:PRTA), around 10.54% of its 13F portfolio. Lonestar Capital Management is also relatively very bullish on the stock, designating 3.67 percent of its 13F equity portfolio to PRTA.

Seeing as Prothena Corporation plc (NASDAQ:PRTA) has experienced a decline in interest from the smart money, logic holds that there were a few fund managers who were dropping their entire stakes by the end of the first quarter. At the top of the heap, Dmitry Balyasny's Balyasny Asset Management dropped the largest investment of the "upper crust" of funds monitored by Insider Monkey, worth an estimated $1.9 million in stock, and Neil Shahrestani's Ikarian Capital was right behind this move, as the fund said goodbye to about $0.5 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 3 funds by the end of the first quarter.

Let's also examine hedge fund activity in other stocks similar to Prothena Corporation plc (NASDAQ:PRTA). These stocks are Midland States Bancorp, Inc. (NASDAQ:MSBI), Boston Omaha Corporation (NASDAQ:BOMN), CEL-SCI Corporation (NYSE:CVM), and Loma Negra Compania Industrial Argentina Sociedad Anonima (NYSE:LOMA). This group of stocks' market caps are closest to PRTA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MSBI,8,5655,-1 BOMN,5,185342,0 CVM,5,10816,0 LOMA,12,30637,5 Average,7.5,58113,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $58 million. That figure was $215 million in PRTA's case. Loma Negra Compania Industrial Argentina Sociedad Anonima (NYSE:LOMA) is the most popular stock in this table. On the other hand Boston Omaha Corporation (NASDAQ:BOMN) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Prothena Corporation plc (NASDAQ:PRTA) 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 gained 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. Unfortunately PRTA wasn't nearly as popular as these 10 stocks and hedge funds that were betting on PRTA were disappointed as the stock returned 19.9% since the end of the first 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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