We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Orchard Therapeutics plc (NASDAQ:ORTX) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is Orchard Therapeutics plc (NASDAQ:ORTX) worth your attention right now? The best stock pickers are taking an optimistic view. The number of bullish hedge fund bets inched up by 3 recently. Our calculations also showed that ORTX isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
Peter Kolchinsky of RA Capital Management
We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to review the new hedge fund action encompassing Orchard Therapeutics plc (NASDAQ:ORTX).
How are hedge funds trading Orchard Therapeutics plc (NASDAQ:ORTX)?
Heading into the first quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ORTX over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Deerfield Management was the largest shareholder of Orchard Therapeutics plc (NASDAQ:ORTX), with a stake worth $121.9 million reported as of the end of September. Trailing Deerfield Management was RA Capital Management, which amassed a stake valued at $87.9 million. Adage Capital Management, Driehaus Capital, and Vivo Capital 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 Deerfield Management allocated the biggest weight to Orchard Therapeutics plc (NASDAQ:ORTX), around 3.89% of its 13F portfolio. Element Capital Management is also relatively very bullish on the stock, designating 2.85 percent of its 13F equity portfolio to ORTX.
As aggregate interest increased, specific money managers have been driving this bullishness. Element Capital Management, managed by Jeffrey Talpins, assembled the biggest position in Orchard Therapeutics plc (NASDAQ:ORTX). Element Capital Management had $13.4 million invested in the company at the end of the quarter. Michael Rockefeller and Karl Kroeker’s Woodline Partners also made a $1.6 million investment in the stock during the quarter. The following funds were also among the new ORTX investors: Peter A. Wright’s P.A.W. CAPITAL PARTNERS, Minhua Zhang’s Weld Capital Management, and Renaissance Technologies.
Let’s also examine hedge fund activity in other stocks similar to Orchard Therapeutics plc (NASDAQ:ORTX). These stocks are Employers Holdings, Inc. (NYSE:EIG), National HealthCare Corporation (NYSE:NHC), 1st Source Corporation (NASDAQ:SRCE), and Aphria Inc. (NYSE:APHA). This group of stocks’ market valuations resemble ORTX’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EIG | 15 | 69551 | 0 |
| NHC | 11 | 65853 | 3 |
| SRCE | 10 | 36730 | 1 |
| APHA | 9 | 16714 | 3 |
| Average | 11.25 | 47212 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $47 million. That figure was $361 million in ORTX’s case. Employers Holdings, Inc. (NYSE:EIG) is the most popular stock in this table. On the other hand Aphria Inc. (NYSE:APHA) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Orchard Therapeutics plc (NASDAQ:ORTX) 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 gained 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately ORTX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ORTX were disappointed as the stock returned -20.9% during the four months of 2020 (through May 1st) 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
