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 Ultragenyx Pharmaceutical Inc (NASDAQ:RARE).
Ultragenyx Pharmaceutical Inc (NASDAQ:RARE) has seen an increase in enthusiasm from smart money in recent months. Our calculations also showed that RARE isn’t among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
We’re going to take a peek at the key hedge fund action regarding Ultragenyx Pharmaceutical Inc (NASDAQ:RARE).
What have hedge funds been doing with Ultragenyx Pharmaceutical Inc (NASDAQ:RARE)?
At the end of the third quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 55% from the previous quarter. By comparison, 12 hedge funds held shares or bullish call options in RARE heading into this year. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, Alkeon Capital Management was the largest shareholder of Ultragenyx Pharmaceutical Inc (NASDAQ:RARE), with a stake worth $56.6 million reported as of the end of September. Trailing Alkeon Capital Management was Highline Capital Management, which amassed a stake valued at $32.7 million. EcoR1 Capital, EcoR1 Capital, and Rock Springs Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, key hedge funds were leading the bulls’ herd. EcoR1 Capital, managed by Oleg Nodelman, created the largest call position in Ultragenyx Pharmaceutical Inc (NASDAQ:RARE). EcoR1 Capital had $24.8 million invested in the company at the end of the quarter. Oleg Nodelman’s EcoR1 Capital also made a $19.4 million investment in the stock during the quarter. The other funds with brand new RARE positions are Noam Gottesman’s GLG Partners, Israel Englander’s Millennium Management, and Jerome Pfund and Michael Sjostrom’s Sectoral Asset Management.
Let’s go over hedge fund activity in other stocks similar to Ultragenyx Pharmaceutical Inc (NASDAQ:RARE). We will take a look at United States Cellular Corporation (NYSE:USM), LaSalle Hotel Properties (NYSE:LHO), The New York Times Company (NYSE:NYT), and Chemical Financial Corporation (NASDAQ:CHFC). This group of stocks’ market caps match RARE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| USM | 15 | 191634 | 2 |
| LHO | 28 | 744016 | -7 |
| NYT | 34 | 897710 | 6 |
| CHFC | 8 | 17870 | 4 |
| Average | 21.25 | 462808 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $463 million. That figure was $163 million in RARE’s case. The New York Times Company (NYSE:NYT) is the most popular stock in this table. On the other hand Chemical Financial Corporation (NASDAQ:CHFC) is the least popular one with only 8 bullish hedge fund positions. Ultragenyx Pharmaceutical Inc (NASDAQ:RARE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard NYT might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
