We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter. One of these stocks was Denali Therapeutics Inc. (NASDAQ:DNLI).
Denali Therapeutics Inc. (NASDAQ:DNLI) has seen an increase in hedge fund sentiment lately. Our calculations also showed that DNLI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s view the new hedge fund action surrounding Denali Therapeutics Inc. (NASDAQ:DNLI).
What does smart money think about Denali Therapeutics Inc. (NASDAQ:DNLI)?
At Q4’s end, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from one quarter earlier. By comparison, 5 hedge funds held shares or bullish call options in DNLI a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Denali Therapeutics Inc. (NASDAQ:DNLI) was held by Casdin Capital, which reported holding $21.8 million worth of stock at the end of September. It was followed by Mark Asset Management with a $1.2 million position. Other investors bullish on the company included Citadel Investment Group, AQR Capital Management, and Marshall Wace LLP. In terms of the portfolio weights assigned to each position Casdin Capital allocated the biggest weight to Denali Therapeutics Inc. (NASDAQ:DNLI), around 2% of its 13F portfolio. Mark Asset Management is also relatively very bullish on the stock, earmarking 0.19 percent of its 13F equity portfolio to DNLI.
As industrywide interest jumped, some big names have jumped into Denali Therapeutics Inc. (NASDAQ:DNLI) headfirst. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, initiated the biggest position in Denali Therapeutics Inc. (NASDAQ:DNLI). Marshall Wace LLP had $0.8 million invested in the company at the end of the quarter. David Harding’s Winton Capital Management also initiated a $0.8 million position during the quarter. The following funds were also among the new DNLI investors: Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Peter Algert and Kevine Coldiron’s Algert Coldiron Investors.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Denali Therapeutics Inc. (NASDAQ:DNLI) but similarly valued. These stocks are SpringWorks Therapeutics, Inc. (NASDAQ:SWTX), Forty Seven, Inc. (NASDAQ:FTSV), Yext, Inc. (NYSE:YEXT), and Arcos Dorados Holding Inc (NYSE:ARCO). This group of stocks’ market valuations are similar to DNLI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SWTX | 11 | 658924 | 0 |
| FTSV | 18 | 351335 | 9 |
| YEXT | 13 | 47303 | -1 |
| ARCO | 13 | 119314 | -1 |
| Average | 13.75 | 294219 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $294 million. That figure was $28 million in DNLI’s case. Forty Seven, Inc. (NASDAQ:FTSV) is the most popular stock in this table. On the other hand SpringWorks Therapeutics, Inc. (NASDAQ:SWTX) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Denali Therapeutics Inc. (NASDAQ:DNLI) is even less popular than SWTX. Hedge funds clearly dropped the ball on DNLI as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but still beat the market by 4.2 percentage points. A small number of hedge funds were also right about betting on DNLI as the stock returned 7.6% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
