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 Genocea Biosciences Inc (NASDAQ:GNCA) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Genocea Biosciences Inc (NASDAQ:GNCA) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of March. At the end of this article we will also compare GNCA to other stocks including Steel Connect, Inc. (NASDAQ:STCN), Centrus Energy Corp. (NYSE:LEU), and Pathfinder Bancorp, Inc. (NASDAQ:PBHC) to get a better sense of its popularity.
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.
Nathan Fischel of DAFNA Capital Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. 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. Keeping this in mind let's view the fresh hedge fund action encompassing Genocea Biosciences Inc (NASDAQ:GNCA).
Hedge fund activity in Genocea Biosciences Inc (NASDAQ:GNCA)
At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. By comparison, 5 hedge funds held shares or bullish call options in GNCA a year ago. With hedge funds' capital changing hands, there exists a few noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
The largest stake in Genocea Biosciences Inc (NASDAQ:GNCA) was held by Biotechnology Value Fund / BVF Inc, which reported holding $3.6 million worth of stock at the end of September. It was followed by Alyeska Investment Group with a $2.6 million position. Other investors bullish on the company included Kingdon Capital, DAFNA Capital Management, and Sabby Capital. In terms of the portfolio weights assigned to each position DAFNA Capital Management allocated the biggest weight to Genocea Biosciences Inc (NASDAQ:GNCA), around 0.39% of its 13F portfolio. Biotechnology Value Fund / BVF Inc is also relatively very bullish on the stock, dishing out 0.34 percent of its 13F equity portfolio to GNCA.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Vivo Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Winton Capital Management).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Genocea Biosciences Inc (NASDAQ:GNCA) but similarly valued. We will take a look at Steel Connect, Inc. (NASDAQ:STCN), Centrus Energy Corp. (NYSE:LEU), Pathfinder Bancorp, Inc. (NASDAQ:PBHC), and Equillium, Inc. (NASDAQ:EQ). This group of stocks' market caps are closest to GNCA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STCN,5,16309,0 LEU,2,560,0 PBHC,1,2533,0 EQ,3,1024,0 Average,2.75,5107,0 [/table]
As you can see these stocks had an average of 2.75 hedge funds with bullish positions and the average amount invested in these stocks was $5 million. That figure was $8 million in GNCA's case. Steel Connect, Inc. (NASDAQ:STCN) is the most popular stock in this table. On the other hand Pathfinder Bancorp, Inc. (NASDAQ:PBHC) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Genocea Biosciences Inc (NASDAQ:GNCA) 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on GNCA as the stock returned 33.7% in Q2 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.
