Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Homology Medicines, Inc. (NASDAQ:FIXX)? The smart money sentiment can provide an answer to this question.
Is FIXX a good stock to buy now? Investors who are in the know were in a bearish mood. The number of bullish hedge fund positions were cut by 5 recently. Homology Medicines, Inc. (NASDAQ:FIXX) was in 11 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 18. Our calculations also showed that FIXX isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 16 hedge funds in our database with FIXX positions at the end of the second quarter.
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 66 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.
Gavin Saitowitz of Prelude Capital
Gavin Saitowitz of Prelude Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. You can subscribe to our free daily newsletter on our website. With all of this in mind let's take a glance at the recent hedge fund action regarding Homology Medicines, Inc. (NASDAQ:FIXX).
Do Hedge Funds Think FIXX Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in FIXX over the last 21 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
Among these funds, Vivo Capital held the most valuable stake in Homology Medicines, Inc. (NASDAQ:FIXX), which was worth $9.1 million at the end of the third quarter. On the second spot was Cormorant Asset Management which amassed $5 million worth of shares. Ghost Tree Capital, Millennium Management, and Algert Global 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 Vivo Capital allocated the biggest weight to Homology Medicines, Inc. (NASDAQ:FIXX), around 0.53% of its 13F portfolio. Ghost Tree Capital is also relatively very bullish on the stock, dishing out 0.42 percent of its 13F equity portfolio to FIXX.
Judging by the fact that Homology Medicines, Inc. (NASDAQ:FIXX) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there were a few hedge funds that slashed their positions entirely by the end of the third quarter. Interestingly, Doron Breen and Mori Arkin's Sphera Global Healthcare Fund sold off the largest investment of the "upper crust" of funds followed by Insider Monkey, totaling close to $10 million in stock, and Kris Jenner, Gordon Bussard, Graham McPhail's Rock Springs Capital Management was right behind this move, as the fund cut about $5.3 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 5 funds by the end of the third quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Homology Medicines, Inc. (NASDAQ:FIXX) but similarly valued. These stocks are CAI International Inc (NYSE:CAI), Plantronics, Inc. (NYSE:PLT), Banco Latinoamericano de Comercio Exterior, S.A. (NYSE:BLX), MagnaChip Semiconductor Corporation (NYSE:MX), Preferred Bank (NASDAQ:PFBC), Ocular Therapeutix Inc (NASDAQ:OCUL), and Allegiance Bancshares, Inc. (NASDAQ:ABTX). All of these stocks' market caps match FIXX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CAI,10,118924,1 PLT,14,20398,4 BLX,2,9318,-1 MX,27,252487,2 PFBC,10,20264,1 OCUL,12,105293,1 ABTX,4,4232,-1 Average,11.3,75845,1 [/table]
As you can see these stocks had an average of 11.3 hedge funds with bullish positions and the average amount invested in these stocks was $76 million. That figure was $19 million in FIXX's case. MagnaChip Semiconductor Corporation (NYSE:MX) is the most popular stock in this table. On the other hand Banco Latinoamericano de Comercio Exterior, S.A. (NYSE:BLX) is the least popular one with only 2 bullish hedge fund positions. Homology Medicines, Inc. (NASDAQ:FIXX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FIXX is 36.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and surpassed the market again by 16.2 percentage points. Unfortunately FIXX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FIXX investors were disappointed as the stock returned -12.7% since the end of September (through 12/8) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
