We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. That’s a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Equillium, Inc. (NASDAQ:EQ) going to take off soon? The best stock pickers are reducing their bets on the stock. The number of long hedge fund bets decreased by 1 in recent months. Our calculations also showed that EQ isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). EQ was in 3 hedge funds’ portfolios at the end of September. There were 4 hedge funds in our database with EQ positions at the end of the previous quarter.
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Israel Englander of Millennium Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now let’s take a look at the new hedge fund action surrounding Equillium, Inc. (NASDAQ:EQ).
How are hedge funds trading Equillium, Inc. (NASDAQ:EQ)?
At Q3’s end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in EQ a year ago. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
Among these funds, Partner Fund Management held the most valuable stake in Equillium, Inc. (NASDAQ:EQ), which was worth $4 million at the end of the third quarter. On the second spot was Alyeska Investment Group which amassed $0.5 million worth of shares. Millennium Management was 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 Partner Fund Management allocated the biggest weight to Equillium, Inc. (NASDAQ:EQ), around 0.12% of its 13F portfolio. Alyeska Investment Group is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to EQ.
Due to the fact that Equillium, Inc. (NASDAQ:EQ) has faced a decline in interest from the aggregate hedge fund industry, we can see that there were a few hedgies that slashed their full holdings last quarter. Interestingly, Charles Clough’s Clough Capital Partners sold off the largest investment of the 750 funds monitored by Insider Monkey, totaling an estimated $1.8 million in stock. Donald Sussman’s fund, Paloma Partners, also cut its stock, about $0.1 million worth. These transactions are important to note, as total hedge fund interest was cut by 1 funds last quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Equillium, Inc. (NASDAQ:EQ) but similarly valued. These stocks are JMP Group LLC (NYSE:JMP), Ecology & Environment, Inc. (NASDAQ:EEI), Nuverra Environmental Solutions Inc (NYSE:NES), and NetSol Technologies Inc. (NASDAQ:NTWK). This group of stocks’ market caps are closest to EQ’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| JMP | 3 | 201 | 1 |
| EEI | 4 | 16269 | 0 |
| NES | 5 | 30207 | 0 |
| NTWK | 5 | 8159 | -1 |
| Average | 4.25 | 13709 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.25 hedge funds with bullish positions and the average amount invested in these stocks was $14 million. That figure was $5 million in EQ’s case. Nuverra Environmental Solutions Inc (NYSE:NES) is the most popular stock in this table. On the other hand JMP Group LLC (NYSE:JMP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Equillium, Inc. (NASDAQ:EQ) is even less popular than JMP. Hedge funds dodged a bullet by taking a bearish stance towards EQ. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately EQ wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); EQ investors were disappointed as the stock returned -14.5% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.