Hedge funds are not perfect. They have their bad picks just like everyone else. Facebook, a stock hedge funds have loved dearly, lost nearly 40% of its value at one point in 2018. Although hedge funds are not perfect, their consensus picks do deliver solid returns, however. Our data show the top 20 S&P 500 stocks among hedge funds beat the S&P 500 Index by nearly 10 percentage points so far in 2019. Because hedge funds have a lot of resources and their consensus picks do well, we pay attention to what they think. In this article, we analyze what the elite funds think of Karuna Therapeutics, Inc. (NASDAQ:KRTX).
Hedge fund interest in Karuna Therapeutics, Inc. (NASDAQ:KRTX) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare KRTX to other stocks including Village Super Market, Inc. (NASDAQ:VLGEA), Switchback Energy Acquisition Corporation (NYSE:SBE), and Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) to get a better sense of its popularity.
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 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.
Kris Jenner of Rock Springs Capital Management
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s take a peek at the key hedge fund action encompassing Karuna Therapeutics, Inc. (NASDAQ:KRTX).
What have hedge funds been doing with Karuna Therapeutics, Inc. (NASDAQ:KRTX)?
At Q3’s end, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 0 hedge funds with a bullish position in KRTX a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Karuna Therapeutics, Inc. (NASDAQ:KRTX) was held by Partner Fund Management, which reported holding $6.7 million worth of stock at the end of September. It was followed by Rock Springs Capital Management with a $5.9 million position. Other investors bullish on the company included Vivo Capital, Citadel Investment Group, and Pentwater Capital Management. In terms of the portfolio weights assigned to each position Vivo Capital allocated the biggest weight to Karuna Therapeutics, Inc. (NASDAQ:KRTX), around 0.6% of its 13F portfolio. Rock Springs Capital Management is also relatively very bullish on the stock, earmarking 0.23 percent of its 13F equity portfolio to KRTX.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Laurion Capital Management. 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 Point72 Asset Management).
Let’s also examine hedge fund activity in other stocks similar to Karuna Therapeutics, Inc. (NASDAQ:KRTX). We will take a look at Village Super Market, Inc. (NASDAQ:VLGEA), Switchback Energy Acquisition Corporation (NYSE:SBE), Verrica Pharmaceuticals Inc. (NASDAQ:VRCA), and Miller Industries, Inc. (NYSE:MLR). This group of stocks’ market caps match KRTX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VLGEA | 8 | 40571 | 0 |
| SBE | 17 | 109079 | 17 |
| VRCA | 3 | 72329 | -2 |
| MLR | 10 | 59784 | 2 |
| Average | 9.5 | 70441 | 4.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $70 million. That figure was $22 million in KRTX’s case. Switchback Energy Acquisition Corporation (NYSE:SBE) is the most popular stock in this table. On the other hand Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) is the least popular one with only 3 bullish hedge fund positions. Karuna Therapeutics, Inc. (NASDAQ:KRTX) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on KRTX as the stock returned 340.4% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
