Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Bicycle Therapeutics plc (NASDAQ:BCYC) to find out whether it was one of their high conviction long-term ideas.
Is Bicycle Therapeutics plc (NASDAQ:BCYC) a buy, sell, or hold? Hedge funds are selling. The number of bullish hedge fund bets fell by 1 lately. Our calculations also showed that BCYC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). BCYC was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. There were 7 hedge funds in our database with BCYC positions at the end of the previous quarter.
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.
Matthew Halbower of Pentwater Capital
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind let’s check out the new hedge fund action surrounding Bicycle Therapeutics plc (NASDAQ:BCYC).
Hedge fund activity in Bicycle Therapeutics plc (NASDAQ:BCYC)
Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in BCYC 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, Tybourne Capital Management was the largest shareholder of Bicycle Therapeutics plc (NASDAQ:BCYC), with a stake worth $22.3 million reported as of the end of September. Trailing Tybourne Capital Management was Aquilo Capital Management, which amassed a stake valued at $8.7 million. BlueCrest Capital Mgmt., Laurion Capital Management, and Pentwater Capital 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 Aquilo Capital Management allocated the biggest weight to Bicycle Therapeutics plc (NASDAQ:BCYC), around 6.15% of its 13F portfolio. Tybourne Capital Management is also relatively very bullish on the stock, earmarking 0.97 percent of its 13F equity portfolio to BCYC.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Polar Capital. 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 none of the 750+ hedge funds tracked by Insider Monkey identified BCYC as a viable investment and initiated a position in the stock.
Let’s now review hedge fund activity in other stocks similar to Bicycle Therapeutics plc (NASDAQ:BCYC). These stocks are KLX Energy Services Holdings, Inc. (NASDAQ:KLXE), Inovio Pharmaceuticals Inc (NASDAQ:INO), Chemung Financial Corp. (NASDAQ:CHMG), and First Bank (NASDAQ:FRBA). This group of stocks’ market caps match BCYC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| KLXE | 13 | 20213 | 5 |
| INO | 3 | 775 | -2 |
| CHMG | 3 | 10137 | -1 |
| FRBA | 4 | 5626 | 1 |
| Average | 5.75 | 9188 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.75 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $34 million in BCYC’s case. KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) is the most popular stock in this table. On the other hand Inovio Pharmaceuticals Inc (NASDAQ:INO) is the least popular one with only 3 bullish hedge fund positions. Bicycle Therapeutics plc (NASDAQ:BCYC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 BCYC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on BCYC were disappointed as the stock returned -23.1% during the fourth quarter (through the end of November) 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 this year.
Disclosure: None. This article was originally published at Insider Monkey.