In this article we are going to use hedge fund sentiment as a tool and determine whether Verastem Inc (NASDAQ:VSTM) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is VSTM a good stock to buy now? Verastem Inc (NASDAQ:VSTM) has seen a decrease in hedge fund sentiment recently. Verastem Inc (NASDAQ:VSTM) was in 11 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 18. Our calculations also showed that VSTM isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.
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 66 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.
Peter Kolchinsky of RA Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. With all of this in mind let’s view the fresh hedge fund action encompassing Verastem Inc (NASDAQ:VSTM).
Do Hedge Funds Think VSTM Is A Good Stock To Buy Now?
At Q3’s end, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -39% from the previous quarter. On the other hand, there were a total of 8 hedge funds with a bullish position in VSTM 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.
More specifically, Biotechnology Value Fund / BVF Inc was the largest shareholder of Verastem Inc (NASDAQ:VSTM), with a stake worth $13 million reported as of the end of September. Trailing Biotechnology Value Fund / BVF Inc was RA Capital Management, which amassed a stake valued at $9.8 million. Opaleye Management, Acuta Capital Partners, and Graham Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Acuta Capital Partners allocated the biggest weight to Verastem Inc (NASDAQ:VSTM), around 0.79% of its 13F portfolio. Biotechnology Value Fund / BVF Inc is also relatively very bullish on the stock, designating 0.71 percent of its 13F equity portfolio to VSTM.
Judging by the fact that Verastem Inc (NASDAQ:VSTM) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of hedge funds who were dropping their positions entirely last quarter. At the top of the heap, Albert Cha and Frank Kung’s Vivo Capital dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, worth about $8 million in stock. Steve Cohen’s fund, Point72 Asset Management, also dropped its stock, about $1.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 7 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Verastem Inc (NASDAQ:VSTM) but similarly valued. We will take a look at Mastech Digital, Inc. (NYSE:MHH), Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB), Organigram Holdings Inc. (NASDAQ:OGI), Vera Bradley, Inc. (NASDAQ:VRA), Misonix, Inc. (NASDAQ:MSON), BlueLinx Holdings Inc. (NYSE:BXC), and Nesco Holdings, Inc. (NYSE:NSCO). This group of stocks’ market valuations are similar to VSTM’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MHH | 4 | 4989 | 1 |
| RRGB | 10 | 12324 | -4 |
| OGI | 4 | 1883 | -1 |
| VRA | 17 | 29891 | 4 |
| MSON | 10 | 24393 | 3 |
| BXC | 13 | 64708 | 3 |
| NSCO | 11 | 11984 | 1 |
| Average | 9.9 | 21453 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.9 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. That figure was $35 million in VSTM’s case. Vera Bradley, Inc. (NASDAQ:VRA) is the most popular stock in this table. On the other hand Mastech Digital, Inc. (NYSE:MHH) is the least popular one with only 4 bullish hedge fund positions. Verastem Inc (NASDAQ:VSTM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VSTM is 43.3. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Hedge funds were also right about betting on VSTM as the stock returned 90.1% since the end of Q3 (through 12/8) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Follow Verastem Inc. (NASDAQ:VSTM)
Follow Verastem Inc. (NASDAQ:VSTM)
Disclosure: None. This article was originally published at Insider Monkey.
