Were Hedge Funds Right About Piling Into Otonomy Inc (OTIC)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Otonomy Inc (NASDAQ:OTIC) based on that data and determine whether they were really smart about the stock.

Is Otonomy Inc (NASDAQ:OTIC) a superb investment today? Prominent investors were taking an optimistic view. The number of bullish hedge fund positions advanced by 1 in recent months. Our calculations also showed that OTIC 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.

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 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 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.

Kamran Moghtaderi of Eversept Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 states that pay the most federal taxes to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind let’s review the new hedge fund action regarding Otonomy Inc (NASDAQ:OTIC).

Hedge fund activity in Otonomy Inc (NASDAQ:OTIC)

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in OTIC over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of Otonomy Inc (NASDAQ:OTIC), with a stake worth $3.8 million reported as of the end of September. Trailing Renaissance Technologies was Ikarian Capital, which amassed a stake valued at $2.7 million. Pura Vida Investments, 683 Capital Partners, and Eversept Partners 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 Pura Vida Investments allocated the biggest weight to Otonomy Inc (NASDAQ:OTIC), around 0.63% of its 13F portfolio. DAFNA Capital Management is also relatively very bullish on the stock, earmarking 0.39 percent of its 13F equity portfolio to OTIC.

Now, specific money managers were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, initiated the biggest position in Otonomy Inc (NASDAQ:OTIC). Point72 Asset Management had $0.4 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also made a $0.1 million investment in the stock during the quarter.

Let’s now review hedge fund activity in other stocks similar to Otonomy Inc (NASDAQ:OTIC). These stocks are Lincoln Educational Services Corporation (NASDAQ:LINC), AGBA Acquisition Limited (NASDAQ:AGBA), Panhandle Oil and Gas Inc. (NYSE:PHX), and Natural Gas Services Group, Inc. (NYSE:NGS). This group of stocks’ market valuations are closest to OTIC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $10 million. That figure was $14 million in OTIC’s case. Natural Gas Services Group, Inc. (NYSE:NGS) is the most popular stock in this table. On the other hand AGBA Acquisition Limited (NASDAQ:AGBA) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Otonomy Inc (NASDAQ:OTIC) 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 13.3% in 2020 through June 25th but still managed to beat the market by 16.8 percentage points. Hedge funds were also right about betting on OTIC as the stock returned 90.4% so far in Q2 (through June 25th) 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.

Disclosure: None. This article was originally published at Insider Monkey.