How Endocyte, Inc. (ECYT) Stacks Up Against Its Peers

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small-caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.

Hedge fund interest in Endocyte, Inc. (NASDAQ:ECYT) shares was flat during the third quarter. This is usually a negative indicator. 6 hedge funds that we track owned the stock on September 30, same as on June 30. At the end of this article we will also compare ECYT to other stocks including Cherry Hill Mortgage Investment Corp (NYSE:CHMI), Achaogen Inc (NASDAQ:AKAO), and ZAIS Financial Corp. (NYSE:ZFC) to get a better sense of its popularity.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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What have hedge funds been doing with Endocyte, Inc. (NASDAQ:ECYT)?

At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, unchanged from the previous quarter. On the other hand, there were a total of 8 hedge funds with a bullish position in ECYT at the beginning of this year, so hedge fund ownership has dipped by 25% in 2016. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Baker Bros. Advisors, led by Julian Baker and Felix Baker, holds the most valuable position in Endocyte, Inc. (NASDAQ:ECYT). Baker Bros. Advisors has a $2.7 million position in the stock. The second largest stake is held by Highland Capital Management, led by James Dondero, which holds a $1.4 million position. Some other peers with similar optimism contain Millennium Management, one of the 10 largest hedge funds in the world, David E. Shaw’s D E Shaw, and Jim Simons’ Renaissance Technologies. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds, which is based on the performance of their 13F long positions in non-micro-cap stocks.

We view hedge fund activity in the stock as unfavorable, but in this case there was only a single hedge fund selling its entire position: PDT Partners. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Renaissance Technologies).

Let’s now take a look at hedge fund activity in other stocks similar to Endocyte, Inc. (NASDAQ:ECYT). These stocks are Cherry Hill Mortgage Investment Corp (NYSE:CHMI), Achaogen Inc (NASDAQ:AKAO), ZAIS Financial Corp. (NYSE:ZFC), and Nivalis Therapeutics Inc (NASDAQ:NVLS). This group of stocks’ market valuations are similar to ECYT’s market valuation.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $7 million in ECYT’s case. Nivalis Therapeutics Inc (NASDAQ:NVLS) is the most popular stock in this table. On the other hand Cherry Hill Mortgage Investment Corp (NYSE:CHMI) is the least popular one with only 4 bullish hedge fund positions. Endocyte, Inc. (NASDAQ:ECYT) 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. In this regard NVLS might be a better candidate to consider taking a long position in.

Disclosure: None