Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about SAGE Therapeutics Inc (NASDAQ:SAGE).
Is SAGE Therapeutics Inc (NASDAQ:SAGE) a bargain? The smart money is taking a bullish view. The number of bullish hedge fund positions went up by 4 in recent months. Our calculations also showed that SAGE 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.
Andreas Halvorsen of Viking Global
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s analyze the latest hedge fund action regarding SAGE Therapeutics Inc (NASDAQ:SAGE).
Hedge fund activity in SAGE Therapeutics Inc (NASDAQ:SAGE)
Heading into the fourth quarter of 2019, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from one quarter earlier. On the other hand, there were a total of 37 hedge funds with a bullish position in SAGE a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The largest stake in SAGE Therapeutics Inc (NASDAQ:SAGE) was held by Palo Alto Investors, which reported holding $95.5 million worth of stock at the end of September. It was followed by Casdin Capital with a $73.2 million position. Other investors bullish on the company included Partner Fund Management, Farallon Capital, and Viking Global. In terms of the portfolio weights assigned to each position Casdin Capital allocated the biggest weight to SAGE Therapeutics Inc (NASDAQ:SAGE), around 7.33% of its portfolio. DAFNA Capital Management is also relatively very bullish on the stock, dishing out 6.58 percent of its 13F equity portfolio to SAGE.
As industrywide interest jumped, some big names have been driving this bullishness. Partner Fund Management, managed by Christopher James, initiated the most outsized position in SAGE Therapeutics Inc (NASDAQ:SAGE). Partner Fund Management had $52.4 million invested in the company at the end of the quarter. Andreas Halvorsen’s Viking Global also initiated a $37 million position during the quarter. The following funds were also among the new SAGE investors: David E. Shaw’s D E Shaw, Israel Englander’s Millennium Management, and Israel Englander’s Millennium Management.
Let’s also examine hedge fund activity in other stocks similar to SAGE Therapeutics Inc (NASDAQ:SAGE). These stocks are Proofpoint Inc (NASDAQ:PFPT), Gildan Activewear Inc (NYSE:GIL), IPG Photonics Corporation (NASDAQ:IPGP), and Lear Corporation (NYSE:LEA). All of these stocks’ market caps match SAGE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PFPT | 42 | 636538 | 6 |
| GIL | 19 | 348320 | -5 |
| IPGP | 14 | 103750 | -2 |
| LEA | 33 | 817858 | 2 |
| Average | 27 | 476617 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $477 million. That figure was $430 million in SAGE’s case. Proofpoint Inc (NASDAQ:PFPT) is the most popular stock in this table. On the other hand IPG Photonics Corporation (NASDAQ:IPGP) is the least popular one with only 14 bullish hedge fund positions. SAGE Therapeutics Inc (NASDAQ:SAGE) is not the most popular stock in this group but hedge fund interest is still above 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. Hedge funds were also right about betting on SAGE, though not to the same extent, as the stock returned 10.3% during the first two months of the fourth quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
