Did Hedge Funds Make The Right Call On Zymeworks Inc. (ZYME) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Zymeworks Inc. (NYSE:ZYME) and determine whether the smart money was really smart about this stock.

Zymeworks Inc. (NYSE:ZYME) investors should be aware of an increase in enthusiasm from smart money recently. Our calculations also showed that ZYME 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.

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 S&P 500 ETFs by more than 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 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 stocks that are in our short portfolio.

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s go over the new hedge fund action surrounding Zymeworks Inc. (NYSE:ZYME).

Hedge fund activity in Zymeworks Inc. (NYSE:ZYME)

Heading into the second quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in ZYME a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Perceptive Advisors held the most valuable stake in Zymeworks Inc. (NYSE:ZYME), which was worth $126.1 million at the end of the third quarter. On the second spot was Great Point Partners which amassed $82.5 million worth of shares. Farallon Capital, Baker Bros. Advisors, and Vivo Capital 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 Great Point Partners allocated the biggest weight to Zymeworks Inc. (NYSE:ZYME), around 8.61% of its 13F portfolio. Logos Capital is also relatively very bullish on the stock, dishing out 4.11 percent of its 13F equity portfolio to ZYME.

As one would reasonably expect, key hedge funds were breaking ground themselves. Redmile Group, managed by Jeremy Green, established the biggest position in Zymeworks Inc. (NYSE:ZYME). Redmile Group had $30.8 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also made a $29.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Samuel Isaly’s OrbiMed Advisors, Arthur B Cohen and Joseph Healey’s Healthcor Management LP, and Anand Parekh’s Alyeska Investment Group.

Let’s go over hedge fund activity in other stocks similar to Zymeworks Inc. (NYSE:ZYME). These stocks are Gibraltar Industries Inc (NASDAQ:ROCK), Cimpress plc (NASDAQ:CMPR), Ryder System, Inc. (NYSE:R), and Mack Cali Realty Corp (NYSE:CLI). All of these stocks’ market caps are closest to ZYME’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $151 million. That figure was $655 million in ZYME’s case. Gibraltar Industries Inc (NASDAQ:ROCK) is the most popular stock in this table. On the other hand Mack Cali Realty Corp (NYSE:CLI) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Zymeworks Inc. (NYSE:ZYME) 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately ZYME wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ZYME were disappointed as the stock returned 1.7% during the second 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.

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