Legendary investors such as Jeffrey Talpins and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don’t publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That’s why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Krystal Biotech, Inc. (NASDAQ:KRYS) from the perspective of those elite funds.
Is Krystal Biotech, Inc. (NASDAQ:KRYS) ready to rally soon? Hedge funds are turning less bullish. The number of long hedge fund positions went down by 4 recently. Our calculations also showed that KRYS isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to analyze the new hedge fund action encompassing Krystal Biotech, Inc. (NASDAQ:KRYS).
What does smart money think about Krystal Biotech, Inc. (NASDAQ:KRYS)?
Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KRYS over the last 16 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Krystal Biotech, Inc. (NASDAQ:KRYS) was held by Redmile Group, which reported holding $43.5 million worth of stock at the end of March. It was followed by Baker Bros. Advisors with a $41.7 million position. Other investors bullish on the company included Frazier Healthcare Partners, OrbiMed Advisors, and Citadel Investment Group.
Seeing as Krystal Biotech, Inc. (NASDAQ:KRYS) has witnessed falling interest from hedge fund managers, it’s safe to say that there exists a select few hedge funds who sold off their entire stakes last quarter. Intriguingly, Jeffrey Jay and David Kroin’s Great Point Partners cut the largest investment of all the hedgies tracked by Insider Monkey, totaling about $16.2 million in stock. Vishal Saluja and Pham Quang’s fund, Endurant Capital Management, also cut its stock, about $2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Krystal Biotech, Inc. (NASDAQ:KRYS) but similarly valued. We will take a look at SunCoke Energy, Inc (NYSE:SXC), Realogy Holdings Corp (NYSE:RLGY), Community Trust Bancorp, Inc. (NASDAQ:CTBI), and Organogenesis Holdings Inc. (NASDAQ:ORGO). This group of stocks’ market caps are similar to KRYS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SXC | 20 | 137167 | -1 |
| RLGY | 24 | 299862 | -4 |
| CTBI | 6 | 19594 | -2 |
| ORGO | 2 | 328 | -2 |
| Average | 13 | 114238 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $114 million. That figure was $190 million in KRYS’s case. Realogy Holdings Corp (NYSE:RLGY) is the most popular stock in this table. On the other hand Organogenesis Holdings Inc. (NASDAQ:ORGO) is the least popular one with only 2 bullish hedge fund positions. Krystal Biotech, Inc. (NASDAQ:KRYS) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately KRYS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KRYS investors were disappointed as the stock returned -13.8% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.
