Amid an overall bull market, many stocks that smart money investors were collectively bullish on 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. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Hedge fund interest in Diffusion Pharmaceuticals Inc. (NASDAQ:DFFN) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Digirad Corporation (NASDAQ:DRAD), Trillium Therapeutics Inc. (NASDAQ:TRIL), and Rexahn Pharmaceuticals, Inc. (NASDAQ:REXN) to gather more data points. Our calculations also showed that DFFN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Jim Simons of Renaissance Technologies
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. Keeping this in mind let’s take a look at the new hedge fund action surrounding Diffusion Pharmaceuticals Inc. (NASDAQ:DFFN).
How have hedgies been trading Diffusion Pharmaceuticals Inc. (NASDAQ:DFFN)?
At the end of the third quarter, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 3 hedge funds held shares or bullish call options in DFFN a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
More specifically, Sabby Capital was the largest shareholder of Diffusion Pharmaceuticals Inc. (NASDAQ:DFFN), with a stake worth $0.9 million reported as of the end of September. Trailing Sabby Capital was Renaissance Technologies, which amassed a stake valued at $0.2 million. Swift Run Capital 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 Sabby Capital allocated the biggest weight to Diffusion Pharmaceuticals Inc. (NASDAQ:DFFN), around 0.47% of its 13F portfolio. Swift Run Capital Management is also relatively very bullish on the stock, earmarking 0.03 percent of its 13F equity portfolio to DFFN.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s go over hedge fund activity in other stocks similar to Diffusion Pharmaceuticals Inc. (NASDAQ:DFFN). We will take a look at Digirad Corporation (NASDAQ:DRAD), Trillium Therapeutics Inc. (NASDAQ:TRIL), Rexahn Pharmaceuticals, Inc. (NASDAQ:REXN), and NanoViricides Inc (NYSE:NNVC). All of these stocks’ market caps are closest to DFFN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DRAD | 4 | 1705 | 0 |
| TRIL | 4 | 879 | 1 |
| REXN | 1 | 224 | 0 |
| NNVC | 1 | 119 | 0 |
| Average | 2.5 | 732 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 2.5 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $1 million in DFFN’s case. Digirad Corporation (NASDAQ:DRAD) is the most popular stock in this table. On the other hand Rexahn Pharmaceuticals, Inc. (NASDAQ:REXN) is the least popular one with only 1 bullish hedge fund positions. Diffusion Pharmaceuticals Inc. (NASDAQ:DFFN) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately DFFN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DFFN were disappointed as the stock returned -77.8% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
