Were Hedge Funds Right About Vanda Pharmaceuticals Inc. (VNDA)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) and determine whether hedge funds skillfully traded this stock.

Hedge fund interest in Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Meredith Corporation (NYSE:MDP), CEVA, Inc. (NASDAQ:CEVA), and Harmonic Inc (NASDAQ:HLIT) to gather more data points. Our calculations also showed that VNDA 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to view the recent hedge fund action regarding Vanda Pharmaceuticals Inc. (NASDAQ:VNDA).

What does smart money think about Vanda Pharmaceuticals Inc. (NASDAQ:VNDA)?

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards VNDA over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Armistice Capital was the largest shareholder of Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), with a stake worth $47.3 million reported as of the end of September. Trailing Armistice Capital was Palo Alto Investors, which amassed a stake valued at $42.8 million. Renaissance Technologies, Sio Capital, and Marshall Wace LLP 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 Palo Alto Investors allocated the biggest weight to Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), around 3.59% of its 13F portfolio. Armistice Capital is also relatively very bullish on the stock, earmarking 2.93 percent of its 13F equity portfolio to VNDA.

Seeing as Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) has faced falling interest from the entirety of the hedge funds we track, it’s easy to see that there is a sect of fund managers that decided to sell off their positions entirely in the first quarter. It’s worth mentioning that Minhua Zhang’s Weld Capital Management sold off the largest position of all the hedgies monitored by Insider Monkey, comprising about $0.4 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund cut about $0.4 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Vanda Pharmaceuticals Inc. (NASDAQ:VNDA). We will take a look at Meredith Corporation (NYSE:MDP), CEVA, Inc. (NASDAQ:CEVA), Harmonic Inc (NASDAQ:HLIT), and Ultra Clean Holdings Inc (NASDAQ:UCTT). All of these stocks’ market caps match VNDA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $61 million. That figure was $179 million in VNDA’s case. Ultra Clean Holdings Inc (NASDAQ:UCTT) is the most popular stock in this table. On the other hand CEVA, Inc. (NASDAQ:CEVA) is the least popular one with only 11 bullish hedge fund positions. Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately VNDA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VNDA were disappointed as the stock returned 4.5% during the same time period 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 many of these stocks already outperformed the market so far this year.

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