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Were Hedge Funds Wrong About Piling Into Zogenix, Inc. (ZGNX)?

Asma UL Husna
·6 min read

In this article we will take a look at whether hedge funds think Zogenix, Inc. (NASDAQ:ZGNX) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Zogenix, Inc. (NASDAQ:ZGNX) ready to rally soon? Hedge funds were becoming more confident. The number of bullish hedge fund bets moved up by 2 in recent months. Zogenix, Inc. (NASDAQ:ZGNX) was in 38 hedge funds' portfolios at the end of June. The all time high for this statistics is 37. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ZGNX isn't among the 30 most popular stocks among hedge funds (click for Q2 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.

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 56 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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Peter Kolchinsky of RA Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we're going to check out the key hedge fund action encompassing Zogenix, Inc. (NASDAQ:ZGNX).

How have hedgies been trading Zogenix, Inc. (NASDAQ:ZGNX)?

At second quarter's end, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the previous quarter. By comparison, 28 hedge funds held shares or bullish call options in ZGNX a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

More specifically, Perceptive Advisors was the largest shareholder of Zogenix, Inc. (NASDAQ:ZGNX), with a stake worth $132.5 million reported as of the end of June. Trailing Perceptive Advisors was RA Capital Management, which amassed a stake valued at $99.3 million. Avoro Capital Advisors (venBio Select Advisor), Farallon Capital, and D E Shaw 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 Eversept Partners allocated the biggest weight to Zogenix, Inc. (NASDAQ:ZGNX), around 4.39% of its 13F portfolio. Logos Capital is also relatively very bullish on the stock, dishing out 2.16 percent of its 13F equity portfolio to ZGNX.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most outsized position in Zogenix, Inc. (NASDAQ:ZGNX). Arrowstreet Capital had $7.6 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also made a $4.5 million investment in the stock during the quarter. The following funds were also among the new ZGNX investors: James Thomas Berylson's Berylson Capital Partners, Bhagwan Jay Rao's Integral Health Asset Management, and Michael Gelband's ExodusPoint Capital.

Let's check out hedge fund activity in other stocks similar to Zogenix, Inc. (NASDAQ:ZGNX). We will take a look at Luminex Corporation (NASDAQ:LMNX), Rush Enterprises, Inc. (NASDAQ:RUSHA), Cerence Inc. (NASDAQ:CRNC), Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA), Urban Outfitters, Inc. (NASDAQ:URBN), Comfort Systems USA, Inc. (NYSE:FIX), and Mueller Water Products, Inc. (NYSE:MWA). This group of stocks' market values are closest to ZGNX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LMNX,27,375386,12 RUSHA,18,59748,1 CRNC,14,148123,3 KNSA,18,294081,8 URBN,20,54759,-3 FIX,22,80323,2 MWA,21,197650,1 Average,20,172867,3.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $173 million. That figure was $596 million in ZGNX's case. Luminex Corporation (NASDAQ:LMNX) is the most popular stock in this table. On the other hand Cerence Inc. (NASDAQ:CRNC) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Zogenix, Inc. (NASDAQ:ZGNX) is more popular among hedge funds. Our overall hedge fund sentiment score for ZGNX is 87. 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. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Unfortunately ZGNX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ZGNX were disappointed as the stock returned -21.1% since the end of the second quarter (through 10/30) 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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