Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees in 2019 amid Powell’s pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the third quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA).
Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA) was in 7 hedge funds’ portfolios at the end of September. STSA investors should be aware of an increase in activity from the world’s largest hedge funds in recent months. There were 0 hedge funds in our database with STSA holdings at the end of the previous quarter. Our calculations also showed that STSA 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.
Peter Kolchinsky of RA Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. We’re going to view the fresh hedge fund action encompassing Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA).
What have hedge funds been doing with Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA)?
Heading into the fourth quarter of 2019, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7 from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STSA over the last 17 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, RA Capital Management was the largest shareholder of Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA), with a stake worth $70.3 million reported as of the end of September. Trailing RA Capital Management was Citadel Investment Group, which amassed a stake valued at $14.4 million. Cormorant Asset Management, Adage Capital Management, and Zimmer Partners 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 RA Capital Management allocated the biggest weight to Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA), around 4.19% of its 13F portfolio. Cormorant Asset Management is also relatively very bullish on the stock, earmarking 0.78 percent of its 13F equity portfolio to STSA.
Consequently, key money managers were leading the bulls’ herd. RA Capital Management, managed by Peter Kolchinsky, created the most valuable position in Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA). RA Capital Management had $70.3 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $14.4 million investment in the stock during the quarter. The other funds with brand new STSA positions are Bihua Chen’s Cormorant Asset Management, Phill Gross and Robert Atchinson’s Adage Capital Management, and Stuart J. Zimmer’s Zimmer Partners.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA) but similarly valued. These stocks are Consolidated Water Co. Ltd. (NASDAQ:CWCO), Gladstone Land Corporation (NASDAQ:LAND), Westwood Holdings Group, Inc. (NYSE:WHG), and Biglari Holdings Inc (NYSE:BH). This group of stocks’ market values match STSA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CWCO | 3 | 10018 | 0 |
| LAND | 6 | 6424 | 0 |
| WHG | 10 | 43281 | -1 |
| BH | 10 | 37782 | 0 |
| Average | 7.25 | 24376 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.25 hedge funds with bullish positions and the average amount invested in these stocks was $24 million. That figure was $109 million in STSA’s case. Westwood Holdings Group, Inc. (NYSE:WHG) is the most popular stock in this table. On the other hand Consolidated Water Co. Ltd. (NASDAQ:CWCO) is the least popular one with only 3 bullish hedge fund positions. Satsuma Pharmaceuticals, Inc. (NASDAQ:STSA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 STSA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); STSA investors were disappointed as the stock returned 5.2% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
