Were Hedge Funds Right About Selling Xencor Inc (XNCR)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Xencor Inc (NASDAQ:XNCR) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Xencor Inc (NASDAQ:XNCR) was in 13 hedge funds’ portfolios at the end of March. XNCR shareholders have witnessed a decrease in hedge fund sentiment of late. There were 16 hedge funds in our database with XNCR holdings at the end of the previous quarter. Our calculations also showed that XNCR 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 9 states that banned plastic bags 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 take a peek at the recent hedge fund action surrounding Xencor Inc (NASDAQ:XNCR).

Hedge fund activity in Xencor Inc (NASDAQ:XNCR)

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in XNCR a year ago. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

The largest stake in Xencor Inc (NASDAQ:XNCR) was held by EcoR1 Capital, which reported holding $74.7 million worth of stock at the end of September. It was followed by Biotechnology Value Fund / BVF Inc with a $50.5 million position. Other investors bullish on the company included Baker Bros. Advisors, Rhenman & Partners Asset Management, and Winton Capital Management. In terms of the portfolio weights assigned to each position EcoR1 Capital allocated the biggest weight to Xencor Inc (NASDAQ:XNCR), around 7.81% of its 13F portfolio. Biotechnology Value Fund / BVF Inc is also relatively very bullish on the stock, earmarking 4.7 percent of its 13F equity portfolio to XNCR.

Since Xencor Inc (NASDAQ:XNCR) has faced a decline in interest from hedge fund managers, logic holds that there is a sect of hedge funds that slashed their entire stakes by the end of the first quarter. At the top of the heap, Mika Toikka’s AlphaCrest Capital Management dropped the largest stake of all the hedgies monitored by Insider Monkey, worth close to $0.9 million in stock. Greg Martinez’s fund, Parkman Healthcare Partners, also cut its stock, about $0.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds by the end of the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Xencor Inc (NASDAQ:XNCR) but similarly valued. These stocks are Micro Focus Intl PLC (NYSE:MFGP), CIT Group Inc. (NYSE:CIT), YETI Holdings, Inc. (NYSE:YETI), and Artisan Partners Asset Management Inc (NYSE:APAM). This group of stocks’ market caps match XNCR’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $139 million. That figure was $162 million in XNCR’s case. CIT Group Inc. (NYSE:CIT) is the most popular stock in this table. On the other hand Micro Focus Intl PLC (NYSE:MFGP) is the least popular one with only 9 bullish hedge fund positions. Xencor Inc (NASDAQ:XNCR) 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. 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 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately XNCR wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); XNCR investors were disappointed as the stock returned 11.8% during the second quarter 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.

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