How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Paratek Pharmaceuticals Inc (NASDAQ:PRTK) and determine whether hedge funds had an edge regarding this stock.
Paratek Pharmaceuticals Inc (NASDAQ:PRTK) investors should be aware of a decrease in enthusiasm from smart money recently. PRTK was in 11 hedge funds’ portfolios at the end of March. There were 13 hedge funds in our database with PRTK holdings at the end of the previous quarter. Our calculations also showed that PRTK isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Kris Jenner of Rock Springs Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. 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 glance at the recent hedge fund action regarding Paratek Pharmaceuticals Inc (NASDAQ:PRTK).
How have hedgies been trading Paratek Pharmaceuticals Inc (NASDAQ:PRTK)?
At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the fourth quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in PRTK 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, Rock Springs Capital Management held the most valuable stake in Paratek Pharmaceuticals Inc (NASDAQ:PRTK), which was worth $4.8 million at the end of the third quarter. On the second spot was D E Shaw which amassed $1.8 million worth of shares. Water Island Capital, Balyasny Asset Management, and Trellus Management Company 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 Trellus Management Company allocated the biggest weight to Paratek Pharmaceuticals Inc (NASDAQ:PRTK), around 1.29% of its 13F portfolio. Rock Springs Capital Management is also relatively very bullish on the stock, earmarking 0.2 percent of its 13F equity portfolio to PRTK.
Due to the fact that Paratek Pharmaceuticals Inc (NASDAQ:PRTK) has experienced declining sentiment from hedge fund managers, we can see that there exists a select few fund managers who sold off their full holdings last quarter. Interestingly, Steven Boyd’s Armistice Capital said goodbye to the biggest stake of all the hedgies watched by Insider Monkey, totaling close to $9.1 million in stock. Lawrence Hawkins’s fund, Prosight Capital, also said goodbye to its stock, about $1.8 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Paratek Pharmaceuticals Inc (NASDAQ:PRTK). These stocks are Prudential Bancorp, Inc. (NASDAQ:PBIP), Energy Fuels Inc (NYSE:UUUU), Permian Basin Royalty Trust (NYSE:PBT), and Perion Network Ltd (NASDAQ:PERI). All of these stocks’ market caps are closest to PRTK’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PBIP | 4 | 25625 | 0 |
| UUUU | 5 | 1354 | 1 |
| PBT | 3 | 1194 | -4 |
| PERI | 7 | 21764 | 1 |
| Average | 4.75 | 12484 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.75 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $11 million in PRTK’s case. Perion Network Ltd (NASDAQ:PERI) is the most popular stock in this table. On the other hand Permian Basin Royalty Trust (NYSE:PBT) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Paratek Pharmaceuticals Inc (NASDAQ:PRTK) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on PRTK as the stock returned 65.7% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
