Hedge Fund Data Suggest You Should Go Long One of These Two Monday Losers

Shares of NewLink Genetics Corp (NASDAQ:NLNK) and Caesarstone Sdot-Yam Ltd (NASDAQ:CSTE) have been losing ground  so far today. Shares of NewLink Genetics were over 19% in the red even despite the company’s announcement on Sunday of “promising” clinical data for its IDO checkpoint inhibitor at the European Cancer Congress 2015 (ECC), as the broader healthcare sector experienced a decline, evidenced by the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) trading lower by over 13%. On the other hand, the catalyst for Caesarstone’s 17% slump today is the resignation of another member of its Board of Directors. Meanwhile, Insider Monkey’s data show that hedge funds only liked one of these two falling stocks, as we will see in the discussion below.

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General opinion is that hedge funds underperform the S&P 500 based on net returns. But we are missing something very important here. Hedge funds generally pull in strong returns from their top small-cap stocks and invest a lot of their resources into analyzing these stocks. They simply don’t take large enough positions in them relative to their portfolios to generate strong overall returns because their large-cap picks underperform the market. We share the top 15 small-cap stocks favored by the best hedge fund managers every quarter and this strategy has managed to outperform the S&P500 every year since it was launched in August 2012, returning 118% and beating the market by over 60 percentage points (read more details). Because of this, we know that collective hedge fund sentiment is very telling and valuable.

Now, let’s turn our attention to NewLink Genetics Corp (NASDAQ:NLNK). The firm announced on Sunday to that its “promising early-stage clinical data,” particularly the  safety, pharmacokinetics and pharmacodynamics data of the phase 1a study of its drug GDC-0919, was presented at the ECC conference in Vienna, Austria. From the study, which involved 19 patients with recurrent or advanced solid tumors, the drug being developed in collaboration with Genentech of the Roche Group was found to show an acceptable safety profile, disease stabilization and preliminary evidence of peripheral pharmacodynamic modulation. The study aimed to assess the safety and tolerability of the drug meant to treat immune tolerance associated with cancer in combination with other therapies. Meanwhile, the adverse events related to the drug were said to be “lower grade” and included itching (37%), fatigue (26%), and decreased appetite (21%).

The move of the NewLink Genetics Corp (NASDAQ:NLNK)’s stock may be counterintuitive in the context of the seemingly positive news and hedge funds seem to be betting on the long-term growth. The number of funds long NewLink increased by one to 15 during the second quarter. Meanwhile, even though the stock declined by over 19% during the period, the total value of hedge fund holdings only decreased by 17.38% to $182.16 million. Moreover, 14.30% of NewLink Genetics’s outstanding stock was owned by hedge funds at the end of June. Israel Englander’s Millennium Management increased its stake in the biopharmaceutical firm by 905% on the quarter to 275,610 shares held at the end of June.

As aforementioned, Caesarstone Sdot-Yam Ltd (NASDAQ:CSTE)’s stock has been weighed down today by the announcement that its Board of Directors has lost another member. According to the firm, Director Avner Naveh has resigned from the board effective immediately, due to a difference of opinion regarding the board’s tasks and decisions. Naveh is allied with Kibbutz Sdot Yam, owner of over 32% of all Caesarstone ordinary shares. The resignation follows the leaving of Director Ram Belinkov, who said that he was leaving the board because his views opposed the board’s in terms of board governance and the granting of options to the firm’s Chief Executive Officer, Yosef Shiran.

Hedge funds appear to have seen this coming trouble for Caesarstone Sdot-Yam Ltd (NASDAQ:CSTE) as there was an outflow of capital from the stock in the second quarter. While the number of hedge funds with long positions in increased by one to 17, the value of their holdings only increased by 6.42% to $183.56 million, amid a 12.90% jump of the stock’s price during the period. This way, hedge funds owned 7.60% of Caesarstone at the end of June. Robert Bishop’s Impala Asset Management reduced its stake in Ceasarstone by 88,108 shares in the second quarter, ending June with 549,075 shares of the firm.

Disclosure: none