See Which of These Two Surging Biotech Stocks Hedge Funds Approve On

Thursday turns out a bad day for investors as major indices slipped by more than 1% amid pressure from declining global markets and hours before Fed Chair Janet Yellen speech on inflation scheduled after the bell. However, in the crowd of many declining stocks, including Caterpillar Inc. (NYSE:CAT), which slipped by over 7% (see here why), several stocks are registering large upside, although many of them are small- and nano-cap companies that don’t have a large impact on the overall market. In this article we would like to discuss two biotech companies, whose stocks advanced today with large trading volumes.

Today’s market activity emphasizes the importance of our research, which focuses on the small-cap space. We analyze the popularity of different stocks among a pool of over 730 hedge funds and our backtests that covered the period between 1999 and 2012 showed that their most popular picks (which are mostly represented by large companies) on average slightly underperform the broader market each month, by around seven basis points to be more specific. On the other hand, their small-cap ideas are less efficiently priced and offer more upside potential, which is why they beat the market by almost one percentage point per month on average. Our strategy involves imitating a portfolio of 15 most popular small-cap picks among hedge funds and it has returned 118% since August 2013, compared to around 59% for the S&P 500 ETF (SPY) (read more details here).

With this in mind, let’s take a closer look at the top gainers in the healthcare today, starting with Arrowhead Research Corp (NASDAQ:ARWR), whose stock opened over 30% in green, but later retracted to around 18%. The boost came on the back of the data released by the company that proved the efficiency of its hepatitis B treatment. Bullish investors have been looking forward to positive results, since the drug might have annual sales of $4.5 billion, taking into account a market entry by 2020, according to Jefferies analysts cited by the Wall Street Journal. Hedge funds from our database are still bullish the stock, taking into account that it has underperformed the biotech industry by around 10 percentage points since the beginning of the year. Between April and June, the number of funds with long positions in Arrowhead Research Corp (NASDAQ:ARWR) slid to nine from 11, while the total value of these stakes dropped to $36.12 million from $63.68 million. Still, at the end of June, hedge funds amassed almost 9% of the company’s outstanding stock in their equity portfolios. The decline of the aggregate value of positions was affected by the most investors’ decisions to limit their exposure to the company. In this way, Israel Englander’s Millennium Management, Daniel Gold‘s QVT Financial, and Julian and Felix Bakers’ Baker Bros. Advisors cut their stakes to 2.14 million shares, 1.60 million shares, and 1.0 million shares, but still ranked as the top three shareholders in our database. On the other hand, billionaires Ken Griffin‘s Citadel Investment Group and Steve Cohen’s Point72 Asset Management disclosed new positions containing 41,700 shares and 22,200 shares of Arrowhead Research in their 13F filings.

The second biotech stock that appreciated today is Capnia Inc (NASDAQ:CAPN)‘s, which has grown by over 14% so far today also on the back of product data. Earlier today, the company said that it had released a paper titled “Measuring End-Tidal Carbon Monoxide of Jaundiced Neonates in the Birth Hospital to Identify Those with Hemolysis” that discusses the efficiency of CoSense End-Tidal Carbon Monoxide Monitor at detecting hemolysis in jaundiced newborns. However, despite the 78% growth of the stock year-to-date, Capnia Inc (NASDAQ:CAPN) still has a market cap of around $25 million and still has to capture the attention of investors, because, as of the end of June, none of the funds from our database own shares of Capnia Inc (NASDAQ:CAPN). However, the company has had a number of bullish signals from insiders, including a recent acquisition of 15,000 shares by board director and large shareholder Ernest Mario and 7,500 shares bought by Senior Vice President and Chief Financial Officer David D. O’Toole.

Disclosure: none