Krystal Biotech, Inc. (KRYS): Hedge Funds In Wait-and-See Mode

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. In this article, we look at what those funds think of Krystal Biotech, Inc. (NASDAQ:KRYS) based on that data.

Hedge fund interest in Krystal Biotech, Inc. (NASDAQ:KRYS) 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 KRYS to other stocks including Cerus Corporation (NASDAQ:CERS), Teekay Tankers Ltd. (NYSE:TNK), and Oyster Point Pharma, Inc. (NASDAQ:OYST) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 58 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Brad Farber of Atika Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the top 15 defense contractors in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. Keeping this in mind let’s take a peek at the latest hedge fund action surrounding Krystal Biotech, Inc. (NASDAQ:KRYS).

What does smart money think about Krystal Biotech, Inc. (NASDAQ:KRYS)?

Heading into the second quarter of 2020, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in KRYS a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Redmile Group held the most valuable stake in Krystal Biotech, Inc. (NASDAQ:KRYS), which was worth $45.5 million at the end of the third quarter. On the second spot was Baker Bros. Advisors which amassed $40.9 million worth of shares. Frazier Healthcare Partners, Consonance Capital Management, and Citadel Investment Group 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 Frazier Healthcare Partners allocated the biggest weight to Krystal Biotech, Inc. (NASDAQ:KRYS), around 4.39% of its 13F portfolio. Consonance Capital Management is also relatively very bullish on the stock, dishing out 2.11 percent of its 13F equity portfolio to KRYS.

Due to the fact that Krystal Biotech, Inc. (NASDAQ:KRYS) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few money managers that decided to sell off their positions entirely by the end of the first quarter. It’s worth mentioning that Samuel Isaly’s OrbiMed Advisors dumped the biggest position of the “upper crust” of funds tracked by Insider Monkey, valued at about $55.1 million in stock. Brad Farber’s fund, Atika Capital, also dropped its stock, about $3.2 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to Krystal Biotech, Inc. (NASDAQ:KRYS). These stocks are Cerus Corporation (NASDAQ:CERS), Teekay Tankers Ltd. (NYSE:TNK), Oyster Point Pharma, Inc. (NASDAQ:OYST), and Phathom Pharmaceuticals, Inc. (NASDAQ:PHAT). All of these stocks’ market caps match KRYS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $122 million. That figure was $189 million in KRYS’s case. Teekay Tankers Ltd. (NYSE:TNK) is the most popular stock in this table. On the other hand Oyster Point Pharma, Inc. (NASDAQ:OYST) is the least popular one with only 4 bullish hedge fund positions. Krystal Biotech, Inc. (NASDAQ:KRYS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.4% in 2020 through June 22nd and surpassed the market by 15.9 percentage points. Unfortunately KRYS wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); KRYS investors were disappointed as the stock returned 3.3% 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 in 2020.

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