These Stocks Surge but Check Out the Hedge Fund Sentiment before Jumping to Conclusions

Markets opened slightly higher on Tuesday as investors await the Fed’s decision regarding interest rates. Nevertheless, a number of companies surged in the first hour of trading and stand out as the top market gainers. In this article we will summarize the developments behind the large gains registered by three stocks on Tuesday and will see whether the hedge fund sentiment towards these companies suggests that the gains represents an overreaction or the companies have a potential to grow further in the long-term.

We assess whether or not hedge funds like a particular company by analyzing the data from the latest round of 13F filings of a pool of over 700 best-skilled hedge funds and other large investors. Even though institutional investors usually file their 13Fs with a delay of up to 45 days after the end of a quarter, their long-term focus can still provide some opportunities for those interested in imitating their moves. However, the key is not to focus on hedge funds’ most popular picks, because, as our backtests covering the period between 1999 and 2012 showed, they are more efficiently priced and don’t represent a good bargain. On the other hand, following hedge funds’ into their small-cap ideas is much better, since our research showed that these stocks can beat the market by almost one percentage point per month. Our small-cap strategy involves imitating 15 most popular small-cap stocks among hedge funds and it has returned 118% since it went live in August 2012, outperforming the S&P 500 ETF (SPY) by around 60 percentage points (read more details here).

With this in mind, let’s start to see what smart money has to say about the top three Tuesday gainers. We’ll start with Evoke Pharma Inc (NASDAQ:EVOK), a nano-cap pharmaceutical company, whose stock spiked by over 20% right after the bell, but has since retracted and currently stands at 15% up. The stock surged after Evoke said that its Phase 3 clinical trial design for EVK-001 aligns with the US Food and Drug Administration’s recommendations. However, due to Evoke Pharma Inc (NASDAQ:EVOK)’s small size and the abysmal decline of 34% since the beginning of the year, hedge funds don’t bet on it and at the end of June only three investors reported small long positions in the company. Among them, James A. Silverman’s Opaleye Management holds the largest stake of $259,100 shares, while Jim Simons‘ Renaissance Technologies initiated a position in Evoke Pharma Inc (NASDAQ:EVOK) during the second quarter and reported 13,000 shares in its latest 13F.