We can judge whether Zafgen Inc (NASDAQ:ZFGN) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.
Zafgen Inc (NASDAQ:ZFGN) was in 14 hedge funds’ portfolios at the end of March. ZFGN investors should pay attention to a decrease in hedge fund interest lately. There were 20 hedge funds in our database with ZFGN positions at the end of the previous quarter. Our calculations also showed that ZFGN isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let’s take a look at the new hedge fund action encompassing Zafgen Inc (NASDAQ:ZFGN).
What have hedge funds been doing with Zafgen Inc (NASDAQ:ZFGN)?
At Q1’s end, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from the fourth quarter of 2018. By comparison, 14 hedge funds held shares or bullish call options in ZFGN a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
More specifically, Great Point Partners was the largest shareholder of Zafgen Inc (NASDAQ:ZFGN), with a stake worth $8.5 million reported as of the end of March. Trailing Great Point Partners was Armistice Capital, which amassed a stake valued at $5.8 million. Farallon Capital, 683 Capital Partners, and Mangrove Partners were also very fond of the stock, giving the stock large weights in their portfolios.
Because Zafgen Inc (NASDAQ:ZFGN) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there was a specific group of hedgies who were dropping their positions entirely last quarter. At the top of the heap, Ken Greenberg and David Kim’s Ghost Tree Capital dropped the biggest stake of all the hedgies followed by Insider Monkey, totaling about $3.7 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund said goodbye to about $2.7 million worth. These moves are important to note, as aggregate hedge fund interest fell by 6 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Zafgen Inc (NASDAQ:ZFGN). We will take a look at NantHealth, Inc. (NASDAQ:NH), DURECT Corporation (NASDAQ:DRRX), RADCOM Ltd. (NASDAQ:RDCM), and EMCORE Corporation (NASDAQ:EMKR). This group of stocks’ market caps are similar to ZFGN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NH | 3 | 906 | -1 |
| DRRX | 4 | 1974 | -2 |
| RDCM | 4 | 13183 | 0 |
| EMKR | 14 | 27286 | 6 |
| Average | 6.25 | 10837 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $11 million. That figure was $34 million in ZFGN’s case. EMCORE Corporation (NASDAQ:EMKR) is the most popular stock in this table. On the other hand NantHealth, Inc. (NASDAQ:NH) is the least popular one with only 3 bullish hedge fund positions. Zafgen Inc (NASDAQ:ZFGN) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately ZFGN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ZFGN were disappointed as the stock returned -48.5% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
