At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.
Hedge fund interest in Scholar Rock Holding Corporation (NASDAQ:SRRK) 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 SRRK to other stocks including Eagle Pharmaceuticals Inc (NASDAQ:EGRX), Adaptimmune Therapeutics plc (NASDAQ:ADAP), and Pzena Investment Management Inc (NYSE:PZN) to get a better sense of its popularity.
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 32 percentage points since May 2014 through March 12, 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.
We’re going to take a look at the key hedge fund action regarding Scholar Rock Holding Corporation (NASDAQ:SRRK).
What have hedge funds been doing with Scholar Rock Holding Corporation (NASDAQ:SRRK)?
At Q4’s end, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in SRRK over the last 14 quarters. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Among these funds, Redmile Group held the most valuable stake in Scholar Rock Holding Corporation (NASDAQ:SRRK), which was worth $40.5 million at the end of the fourth quarter. On the second spot was EcoR1 Capital which amassed $33.9 million worth of shares. Moreover, Cormorant Asset Management and Millennium Management were also bullish on Scholar Rock Holding Corporation (NASDAQ:SRRK), allocating a large percentage of their portfolios to this stock.
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 Millennium Management).
Let’s go over hedge fund activity in other stocks similar to Scholar Rock Holding Corporation (NASDAQ:SRRK). We will take a look at Eagle Pharmaceuticals Inc (NASDAQ:EGRX), Adaptimmune Therapeutics plc (NASDAQ:ADAP), Pzena Investment Management Inc (NYSE:PZN), and Conn’s, Inc. (NASDAQ:CONN). This group of stocks’ market caps match SRRK’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EGRX | 21 | 143787 | 2 |
| ADAP | 12 | 196466 | -1 |
| PZN | 5 | 14906 | 1 |
| CONN | 14 | 151488 | -5 |
| Average | 13 | 126662 | -0.75 |
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 $127 million. That figure was $80 million in SRRK’s case. Eagle Pharmaceuticals Inc (NASDAQ:EGRX) is the most popular stock in this table. On the other hand Pzena Investment Management Inc (NYSE:PZN) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Scholar Rock Holding Corporation (NASDAQ:SRRK) is even less popular than PZN. Hedge funds dodged a bullet by taking a bearish stance towards SRRK. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately SRRK wasn’t nearly as popular as these 15 stock (hedge fund sentiment was very bearish); SRRK investors were disappointed as the stock returned -25.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.