Should You Avoid Flexion Therapeutics Inc (FLXN)?

Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Is Flexion Therapeutics Inc (NASDAQ:FLXN) undervalued? Hedge funds are categorically getting less optimistic. The number of bullish hedge fund investments were cut by 3 in recent months. FLXN was in 8 hedge funds’ portfolios at the end of September. There were 11 hedge funds in our database with FLXN holdings at the end of the previous quarter. At the end of this article we will also compare FLXN to other stocks including Alon USA Partners LP (NYSE:ALDW), Motorcar Parts of America, Inc. (NASDAQ:MPAA), and Sabine Royalty Trust (NYSE:SBR) to get a better sense of its popularity.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

Monkey Business Images/Shutterstock.com

Now, let’s take a look at the latest action regarding Flexion Therapeutics Inc (NASDAQ:FLXN).

How have hedgies been trading Flexion Therapeutics Inc (NASDAQ:FLXN)?

At Q3’s end, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a decline of 27% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FLXN over the last 5 quarters. With hedgies’ sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Mark Kingdon’s Kingdon Capital has the number one position in Flexion Therapeutics Inc (NASDAQ:FLXN), worth close to $20.9 million, corresponding to 1% of its total 13F portfolio. On Kingdon Capital’s heels is Driehaus Capital, led by Richard Driehaus, holding a $15.8 million position; 0.5% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions encompass Glenn Russell Dubin’s Highbridge Capital Management, Gregory Fraser, Rudolph Kluiber, and Timothy Krochuk’s GRT Capital Partners and Jonathan Dawson’s Southport Management. We should note that GRT Capital Partners is among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Since Flexion Therapeutics Inc (NASDAQ:FLXN) has encountered a decline in interest from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of hedgies who sold off their positions entirely heading into Q4. At the top of the heap, Phill Gross and Robert Atchinson’s Adage Capital Management said goodbye to the biggest stake of the 700 funds monitored by Insider Monkey, comprising close to $1.1 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund cut about $0.9 million worth of shares.

Let’s now take a look at hedge fund activity in other stocks similar to Flexion Therapeutics Inc (NASDAQ:FLXN). We will take a look at Alon USA Partners LP (NYSE:ALDW), Motorcar Parts of America, Inc. (NASDAQ:MPAA), Sabine Royalty Trust (NYSE:SBR), and MDC Partners Inc. (USA) (NASDAQ:MDCA). This group of stocks’ market values are similar to FLXN’s market value.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $46 million. That figure was $40 million in FLXN’s case. MDC Partners Inc. (USA) (NASDAQ:MDCA) is the most popular stock in this table. On the other hand Alon USA Partners LP (NYSE:ALDW) is the least popular one with only 4 bullish hedge fund positions. Flexion Therapeutics Inc (NASDAQ:FLXN) 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. In this regard MDCA might be a better candidate to consider taking a long position in.

Disclosure: None