Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors’ favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds’ top consensus picks. This year hedge funds’ top 20 stock picks outperformed the S&P 500 Index by 9.9 percentage points through the end of November. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) has experienced an increase in enthusiasm from smart money lately. Our calculations also showed that DCPH 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.
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.
Samuel Isaly of OrbiMed Advisors
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the latest hedge fund action regarding Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH).
What have hedge funds been doing with Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH)?
At Q3’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 73% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in DCPH a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Redmile Group held the most valuable stake in Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), which was worth $162.3 million at the end of the third quarter. On the second spot was Millennium Management which amassed $91.6 million worth of shares. OrbiMed Advisors, Alkeon Capital Management, and Cormorant Asset Management were 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 Redmile Group allocated the biggest weight to Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), around 5.43% of its portfolio. Opaleye Management is also relatively very bullish on the stock, dishing out 2.82 percent of its 13F equity portfolio to DCPH.
As one would reasonably expect, key money managers were leading the bulls’ herd. Cormorant Asset Management, managed by Bihua Chen, created the most outsized position in Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH). Cormorant Asset Management had $26.8 million invested in the company at the end of the quarter. Farallon Capital also made a $25.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Mark Lampert’s Biotechnology Value Fund, Brian Ashford-Russell and Tim Woolley’s Polar Capital, and Kris Jenner, Gordon Bussard, Graham McPhail’s Rock Springs Capital Management.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) but similarly valued. These stocks are CSG Systems International, Inc. (NASDAQ:CSGS), Group 1 Automotive, Inc. (NYSE:GPI), Skyline Champion Corporation (NYSE:SKY), and Fanhua Inc. (NASDAQ:FANH). This group of stocks’ market valuations match DCPH’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CSGS | 19 | 221276 | 1 |
| GPI | 20 | 171213 | 7 |
| SKY | 25 | 283836 | 0 |
| FANH | 8 | 16703 | -1 |
| Average | 18 | 173257 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $173 million. That figure was $543 million in DCPH’s case. Skyline Champion Corporation (NYSE:SKY) is the most popular stock in this table. On the other hand Fanhua Inc. (NASDAQ:FANH) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) is more popular among hedge funds. 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. Hedge funds were also right about betting on DCPH as the stock returned 39.3% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
