At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Veracyte Inc (NASDAQ:VCYT) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Is Veracyte Inc (NASDAQ:VCYT) undervalued? Hedge funds were taking a pessimistic view. The number of long hedge fund positions fell by 2 in recent months. Our calculations also showed that VCYT isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
J. Carlo Cannell of Cannell Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a peek at the latest hedge fund action encompassing Veracyte Inc (NASDAQ:VCYT).
What does smart money think about Veracyte Inc (NASDAQ:VCYT)?
At Q1’s end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in VCYT over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Farallon Capital, holds the most valuable position in Veracyte Inc (NASDAQ:VCYT). Farallon Capital has a $33.4 million position in the stock, comprising 0.3% of its 13F portfolio. The second most bullish fund manager is Cannell Capital, led by J. Carlo Cannell, holding a $7.2 million position; 3% of its 13F portfolio is allocated to the stock. Remaining professional money managers that hold long positions include Cliff Asness’s AQR Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Cannell Capital allocated the biggest weight to Veracyte Inc (NASDAQ:VCYT), around 3% of its 13F portfolio. Farallon Capital is also relatively very bullish on the stock, earmarking 0.29 percent of its 13F equity portfolio to VCYT.
Because Veracyte Inc (NASDAQ:VCYT) has experienced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there is a sect of funds who were dropping their positions entirely heading into Q4. At the top of the heap, Benjamin A. Smith’s Laurion Capital Management sold off the largest investment of the “upper crust” of funds monitored by Insider Monkey, valued at close to $2.2 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund said goodbye to about $0.3 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 2 funds heading into Q4.
Let’s check out hedge fund activity in other stocks similar to Veracyte Inc (NASDAQ:VCYT). These stocks are Cinemark Holdings, Inc. (NYSE:CNK), BMC Stock Holdings, Inc. (NASDAQ:BMCH), Magellan Health Inc (NASDAQ:MGLN), and Ligand Pharmaceuticals Inc. (NASDAQ:LGND). This group of stocks’ market caps resemble VCYT’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CNK | 27 | 190636 | 5 |
| BMCH | 23 | 210249 | -6 |
| MGLN | 15 | 234535 | -4 |
| LGND | 27 | 242071 | 4 |
| Average | 23 | 219373 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $219 million. That figure was $58 million in VCYT’s case. Cinemark Holdings, Inc. (NYSE:CNK) is the most popular stock in this table. On the other hand Magellan Health Inc (NASDAQ:MGLN) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Veracyte Inc (NASDAQ:VCYT) is even less popular than MGLN. Hedge funds dodged a bullet by taking a bearish stance towards VCYT. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately VCYT wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); VCYT investors were disappointed as the stock returned 6.5% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
