Hedge Funds Are Selling Otonomy Inc (OTIC)

The worries about the election and the ongoing uncertainty about the path of interest-rate increases have been keeping investors on the sidelines. Of course, most hedge funds and other asset managers have been underperforming main stock market indices since the middle of 2015. Interestingly though, smaller-cap stocks registered their best performance relative to the large-capitalization stocks since the end of the June quarter, suggesting that this may be the best time to take a cue from their stock picks. In fact, the Russell 2000 Index gained more than 15% since the beginning of the third quarter, while the Standard and Poor’s 500 benchmark returned less than 6%. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Otonomy Inc (NASDAQ:OTIC) .

Otonomy Inc (NASDAQ:OTIC) was in 11 hedge funds’ portfolios at the end of the third quarter of 2016. OTIC shareholders have witnessed a decrease in activity from the world’s largest hedge funds recently. There were 12 hedge funds in our database with OTIC positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Titan International Inc (NYSE:TWI), ConnectOne Bancorp Inc (NASDAQ:CNOB), and Ellington Financial LLC (NYSE:EFC) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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With all of this in mind, let’s check out the latest action encompassing Otonomy Inc (NASDAQ:OTIC).

What have hedge funds been doing with Otonomy Inc (NASDAQ:OTIC)?

At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the second quarter of 2016. On the other hand, there were a total of 15 hedge funds with a bullish position in OTIC at the beginning of this year. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, OrbiMed Advisors, led by Samuel Isaly, holds the largest position in Otonomy Inc (NASDAQ:OTIC). OrbiMed Advisors has a $33.7 million position in the stock, comprising 0.4% of its 13F portfolio. Sitting at the No. 2 spot is Millennium Management, one of the biggest hedge funds in the world, holding a $11.6 million position; less than 0.1% of its 13F portfolio is allocated to the stock. Some other professional money managers that hold long positions consist of Mark Kingdon’s Kingdon Capital, James Dondero’s Highland Capital Management and Ken Griffin’s Citadel Investment Group. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single elite fund selling its entire position: Point72 Asset Management. One elite fund selling its entire position doesn’t always imply a bearish intent. Theoretically a elite fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ elite funds tracked by Insider Monkey identified OTIC as a viable investment and initiated a position in the stock.

Let’s now take a look at hedge fund activity in other stocks similar to Otonomy Inc (NASDAQ:OTIC). We will take a look at Titan International Inc (NYSE:TWI), ConnectOne Bancorp Inc (NASDAQ:CNOB), Ellington Financial LLC (NYSE:EFC), and Par Pacific Holdings, Inc. (NYSEMKT:PARR). This group of stocks’ market valuations are similar to OTIC’s market valuation.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $84 million in OTIC’s case. Par Pacific Holdings, Inc. (NYSEMKT:PARR) is the most popular stock in this table. On the other hand Ellington Financial LLC (NYSE:EFC) is the least popular one with only 3 bullish hedge fund positions. Otonomy Inc (NASDAQ:OTIC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard PARR might be a better candidate to consider taking a long position in.