Why Gains Registered by These Three Stocks on Tuesday May Be an Overreaction

Radius Health Inc (NASDAQ:RDUS), Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) and Alexza Pharmaceuticals, Inc. (NASDAQ:ALXA) have been trending today as their stocks registered gains in the intraday trading. However, even as shares of the firms are up, hedge fund sentiment was down for two of these three stocks in the second quarter, as we will see in our analysis of hedge fund sentiment alongside the developments that fueled the growth of the three stocks.

First, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 118% since the launch of our small-cap strategy, over 60 percentage points more than the S&P 500 (see more details).

Radius Health Inc (NASDAQ:RDUS)’s shares were nearly 10% in green today, a welcome reprieve for the stock which sank by over 9% yesterday. Furthermore, the stock’s rise today comes after the stock’s price declined more 9% over the course of last week, despite two analyst firms with positive updates on the stock. On Friday last week, Cantor Fitzgerald reiterated its ‘Buy’ rating and price target of $85 after Radius Health had announced top line results for a Phase 1 study showing healthy volunteers exhibiting a tolerable safety profile for its drug RAD1901 in a multiple-ascending dose trial. Analyst Mara Goldstein said that the stock has potential to have greater value as the trials progress. She said that the stock has been volatile because of a combination of profit taking in the weak biotechnology market and the strong year-to-date performance of the stock. Meanwhile, Canaccord Genuity, on Thursday, boosted its price target on the stock to $85 per share from $70 with a ‘Buy’ rating.

Radius Health Inc (NASDAQ:RDUS) saw a small increase in the number of hedge funds’ positions in the second quarter to 23, worth $487.21 million in aggregate, up by 66% on the quarter and amassing 19% of Radius Health’s outstanding stock. Nonetheless, the stock jumped by 64.48% in the said period. Bain Capital’s Brookside Capital owned 2.28 million shares at the end of June.

Meanwhile, shares of Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) were up 3.49% on the back of rising oil prices and comments made by Joaquim Levy, Brazil’s finance minister, praising the firm for moving in the right direction in cost cutting and dealing with the corruption scandal. WTI Crude Oil is up nearly 2% today.

However, hedge funds were spooked during the second quarter by the issues hounding Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) as four fewer hedge funds were long in the stock by June 30, down to 31 investors. The aggregate value of their positions increased by 3.18% to $760.56 million, a relatively measly increase compared to the stock climbing 50.58% in the said quarter. Senator Investment Group, led by Doug Silverman and Alexander Klabin, owned 20 million shares of Petrobras at the end of the second quarter.

Alexza Pharmaceuticals, Inc. (NASDAQ:ALXA) is up 1.74%, retracting from the 8% gain after it announced on Monday that it had retained Guggenheim Securities, LLC to study the possibility of selling one or more of its corporate assets. On Monday, the stock sunk by more than 14%. The studying of options to enhance shareholder value comes as Alexza said that they continue to move forward with their Staccato inhaled drug technology, which the firm sees value in. It should be noted, however, that hedge funds have shunned going long Alexza Pharmaceuticals, Inc. (NASDAQ:ALXA) in the second quarter as there were no reported shares owned by hedge funds we track by the end of June. Ken Griffin’s Citadel Investment Group dumped all of its 21,327 shares during the second quarter. Citadel, among hedge funds we track, was the sole investor in the stock in the first quarter.

Disclosure: None