Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Heron Therapeutics Inc (NASDAQ:HRTX)? The smart money sentiment can provide an answer to this question.
Heron Therapeutics Inc (NASDAQ:HRTX) was in 31 hedge funds’ portfolios at the end of March. HRTX investors should pay attention to an increase in hedge fund sentiment lately. There were 25 hedge funds in our database with HRTX holdings at the end of the previous quarter. Our calculations also showed that hrtx 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 40 percentage points since May 2014 through May 30, 2019 (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.
Let’s take a look at the fresh hedge fund action surrounding Heron Therapeutics Inc (NASDAQ:HRTX).
What have hedge funds been doing with Heron Therapeutics Inc (NASDAQ:HRTX)?
At Q1’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HRTX over the last 15 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Kevin C. Tang’s Tang Capital Management has the largest position in Heron Therapeutics Inc (NASDAQ:HRTX), worth close to $140.4 million, amounting to 25.9% of its total 13F portfolio. The second most bullish fund manager is Julian Baker and Felix Baker of Baker Bros. Advisors, with a $122.6 million position; 0.8% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that hold long positions encompass Roberto Mignone’s Bridger Management, David Rosen’s Rubric Capital Management and D. E. Shaw’s D E Shaw.
Now, some big names have been driving this bullishness. Water Street Capital, managed by Gilchrist Berg, created the largest position in Heron Therapeutics Inc (NASDAQ:HRTX). Water Street Capital had $11.2 million invested in the company at the end of the quarter. Kevin Kotler’s Broadfin Capital also initiated a $9.8 million position during the quarter. The other funds with brand new HRTX positions are Matthew Hulsizer’s PEAK6 Capital Management, Steve Cohen’s Point72 Asset Management, and Mark Kingdon’s Kingdon Capital.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Heron Therapeutics Inc (NASDAQ:HRTX) but similarly valued. These stocks are LCI Industries (NYSE:LCII), Deluxe Corporation (NYSE:DLX), Select Medical Holdings Corporation (NYSE:SEM), and The RMR Group Inc. (NASDAQ:RMR). This group of stocks’ market valuations are similar to HRTX’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LCII | 8 | 62665 | 0 |
| DLX | 21 | 127823 | -3 |
| SEM | 21 | 177800 | 2 |
| RMR | 20 | 50019 | 6 |
| Average | 17.5 | 104577 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $105 million. That figure was $592 million in HRTX’s case. Deluxe Corporation (NYSE:DLX) is the most popular stock in this table. On the other hand LCI Industries (NYSE:LCII) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Heron Therapeutics Inc (NASDAQ:HRTX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately HRTX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on HRTX were disappointed as the stock returned -29.1% during the same period 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
