Is Verona Pharma plc (VRNA) A Good Stock To Buy?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks initially suffered the most but many of these stocks delivered strong returns since November and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment towards Verona Pharma plc (NASDAQ:VRNA) changed recently.

IS VRNA a good stock to buy? Verona Pharma plc (NASDAQ:VRNA) has experienced a decrease in support from the world’s most elite money managers recently. Verona Pharma plc (NASDAQ:VRNA) was in 10 hedge funds’ portfolios at the end of June. The all time high for this statistic is 12. There were 12 hedge funds in our database with VRNA positions at the end of the first quarter. Our calculations also showed that VRNA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 percentage points since March 2017 (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.

Jim Tananbaum of Foresite Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we’re going to analyze the new hedge fund action surrounding Verona Pharma plc (NASDAQ:VRNA).

Do Hedge Funds Think VRNA Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in VRNA over the last 24 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

The largest stake in Verona Pharma plc (NASDAQ:VRNA) was held by OrbiMed Advisors, which reported holding $37.2 million worth of stock at the end of June. It was followed by RA Capital Management with a $33.4 million position. Other investors bullish on the company included Vivo Capital, Perceptive Advisors, and Foresite Capital. In terms of the portfolio weights assigned to each position Foresite Capital allocated the biggest weight to Verona Pharma plc (NASDAQ:VRNA), around 7.7% of its 13F portfolio. Ghost Tree Capital is also relatively very bullish on the stock, designating 1.8 percent of its 13F equity portfolio to VRNA.

Because Verona Pharma plc (NASDAQ:VRNA) has faced a decline in interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedge funds that decided to sell off their full holdings last quarter. It’s worth mentioning that Andre F. Perold’s HighVista Strategies dumped the largest position of all the hedgies tracked by Insider Monkey, worth about $0.3 million in stock. Nathan Fischel’s fund, DAFNA Capital Management, also cut its stock, about $0.2 million worth. These transactions are important to note, as total hedge fund interest was cut by 2 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Verona Pharma plc (NASDAQ:VRNA) but similarly valued. We will take a look at BioVie Inc. (NASDAQ:BIVI), Altimmune, Inc. (NASDAQ:ALT), Teekay Corporation (NYSE:TK), Alexco Resource Corp. (NYSE:AXU), Target Hospitality Corp. (NASDAQ:TH), 89bio, Inc. (NASDAQ:ETNB), and Primis Financial Corp. (NASDAQ:FRST). This group of stocks’ market values are similar to VRNA’s market value.

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As you can see these stocks had an average of 8.7 hedge funds with bullish positions and the average amount invested in these stocks was $55 million. That figure was $142 million in VRNA’s case. Altimmune, Inc. (NASDAQ:ALT) is the most popular stock in this table. On the other hand BioVie Inc. (NASDAQ:BIVI) is the least popular one with only 1 bullish hedge fund positions. Verona Pharma plc (NASDAQ:VRNA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VRNA is 62.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 25.7% in 2021 through September 27th and beat the market again by 6.2 percentage points. Unfortunately VRNA wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on VRNA were disappointed as the stock returned -14.8% since the end of June (through 9/27) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.