Discovery Laboratories, Inc. (DSCO): Are Hedge Funds Right About This Stock?

How do you pick the next stock to invest in? One way would be to spend hours 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 Discovery Laboratories, Inc. (NASDAQ:DSCO).

Discovery Laboratories, Inc. (NASDAQ:DSCO) has experienced an increase in activity from the world’s largest hedge funds recently. However, the stock market is not in agreement with the hedge fund sentiment, as the shares of Discovery Laboratories, Inc. (NASDAQ:DSCO) dropped 55.88% during the quarter. In order to understand more about the hedge fund interest, we will cover hedge funds that had positions in the company, at the end of the last quarter.

One of the best ways to understand hedge fund behavior towards any stock is to study their sentiment towards companies with similar market caps. Proceeding on that approach, we will compare Discovery Laboratories, Inc. (NASDAQ:DSCO) to other stocks, including Alphatec Holdings Inc (NASDAQ:ATEC), Dover Downs Gaming & Entertainment, Inc. (NYSE:DDE), and On Track Innovations Ltd.(USA) (NASDAQ:OTIV) to get a better sense of its popularity.

To most market participants, hedge funds are seen as unimportant, old financial vehicles of yesteryear. While there are greater than 8000 funds in operation today, we hone in on the masters of this club, about 700 funds. These hedge fund managers oversee the lion’s share of all hedge funds’ total capital, and by observing their inimitable equity investments, Insider Monkey has spotted various investment strategies that have historically outrun Mr. Market. Insider Monkey’s small-cap hedge fund strategy surpassed the S&P 500 index by 12 percentage points annually for a decade in their back tests.

Keeping this in mind, let’s analyze the latest action surrounding Discovery Laboratories, Inc. (NASDAQ:DSCO).

Hedge fund activity in Discovery Laboratories, Inc. (NASDAQ:DSCO)

At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, an increase of 13% from the previous quarter. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Broadfin Capital, managed by Kevin Kotler, holds the largest position in Discovery Laboratories, Inc. (NASDAQ:DSCO). Broadfin Capital has a $2.8 million position in the stock, comprising 0.2% of its 13F portfolio. The second largest stake is held by James E. Flynn of Deerfield Management, with a $2.6 million position; 0.1% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors with similar optimism include Nathan Fischel’s DAFNA Capital Management, Hal Mintz’s Sabby Capital, and Anand Parekh’s Alyeska Investment Group.

As aggregate interest increased, key hedge funds have been driving this bullishness. Sabby Capital initiated the biggest position in Discovery Laboratories, Inc. (NASDAQ:DSCO). Sabby Capital had $1.4 million invested in the company at the end of the quarter. Jeffrey Jay and David Kroin’s Great Point Partners also initiated a $0.8 million position during the quarter. The only other fund with a brand new Discovery Laboratories, Inc. (NASDAQ:DSCO) position is Anand Parekh’s Alyeska Investment Group.

Let’s go over hedge fund activity in other stocks similar to Discovery Laboratories, Inc. (NASDAQ:DSCO). These stocks are Alphatec Holdings Inc (NASDAQ:ATEC), Dover Downs Gaming & Entertainment, Inc. (NYSE:DDE), On Track Innovations Ltd.(USA) (NASDAQ:OTIV), and Cogentix Medical Inc (NASDAQ:CGNT). This group of stocks’ market values resemble Discovery Laboratories, Inc. (NASDAQ:DSCO)’s market value.

As you can see, these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $3 million. That figure was $13 million in Discovery Laboratories, Inc. (NASDAQ:DSCO)’s case. Cogentix Medical Inc (NASDAQ:CGNT) is the most popular stock in this table. On the other hand, Alphatec Holdings Inc (NASDAQ:ATEC) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Discovery Laboratories, Inc. (NASDAQ:DSCO) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.