MercadoLibre was the hottest stock in the fourth-quarter surging by over 21 percent, easily outpacing the S&P 500’s return of only 6 percent. According to the WhaleWisdom 13F heatmap, the company was the number one stock amongst institutions in the fourth quarter.

However, 2018 has been far different, with shares surging by over 30 percent through the beginning of March, then reversing and plunging 24 percent since reaching its highs. The company reported results on May 4 that were negatively impacted by an accounting rule change. The absorption of shipping costs resulted in an unexpected loss for the first quarter of $0.29 per share.

Institutional Buying

Institutions were aggressively adding to shares of the South American e-commerce company during the fourth-quarter, with the number of aggregate 13F shares rising by almost 3 percent to 40.614 million shares.  A total of 79 institutions bought a new position, while 115 added to holdings. Only 43 institutions exited the stock, while 142 reduced the number of shares.  Given the poor price performance and the changes to the accounting standards, it would not be surprising to see institutions fleeing the stock in the first quarter when new reports get filed on May 15.

Analyst Slash Estimates

Analysts have been slashing their earnings estimates for the stock aggressively since February for the full-year 2018. In fact, estimates for earnings per share have fallen an astounding 66 percent to only $0.94 from $2.79, over the past three months. Revenue estimates have also been slashed by over 18.5 percent to just $1.67 billion from $2.06 billion.

Price Targets Remain High

In an odd twist, the average analyst price target for the stock is $361, about 14 percent higher than the stocks current price around $314. What is also bizarre, is that the price target has risen by 27.5 percent since the beginning of the year, despite the stock’s steep decline over the last few months. It would not be surprising to see those aggressive price targets start to reverse.

Technical Take

The technical chart would suggest shares are likely not finished falling, with a technical gap at $298 that likely gets filled, a decline of 5 percent further. The $298 price also represents a critical support level and should the stock fall below that price; it could suffer an even steeper decline. The relative strength index (RSI) is also continuing to trend lower, and it would need to fall below 30 to reach oversold conditions.

Investors were very enthusiastic getting into shares of Mercado Libre in the fourth-quarter. However, that enthusiasm quickly faded by mid- February, and became a stampede to leave, making what had been one of the hottest stocks amongst institutions potentially into the most hated.

NVIDIA shares have soared over the past three years surging by more than tenfold. An incredible run, putting the stock in a group of the elite performers. Analysts and investors continue to think shares of NVIDIA can rise even higher, adding to its already monstrous gains.

Shares of the chipmaker are off to a hot start in 2018, with the stock climbing by 23 percent, easily beating the S&P 500’s loss by nearly 24 percentage points. The stock was put into the WhaleWisdom WhaleIndex during February of 2017; shares have soared by about 120 percent since the addition.

Higher Prices

Analysts are looking for shares of NVIDIA to climb in the future, with an average price target on the stock at around $250. Meanwhile, 58 percent of the 36 analysts covering the stock rate shares as a “buy” or “outperform,” while 33 percent rate shares a “hold.” However, some analysts see the price rising much higher, to $305, based on data provided by Ycharts. Those targets have steadily climbed over the years, as the company consistently beats earnings and revenue targets.

Results Coming

The company is expected to report fiscal first-quarter 2019 earnings estimates on Thursday, May 10 after the close of trading. Analysts are looking for the company to report earnings climbed by nearly 94 percent versus the same period a year ago to $1.65 per share. Sales are expected to rise by nearly 49 percent to $2.879 billion.  The company has consistently beaten on both the top and bottom line over the past several quarters.

Adding Shares

Investors were adding shares of NVIDIA to their portfolios in a big way in the fourth quarter. With nearly 202 new institutions creating new positions in the stock, while 418 of them added to existing shares. Only 73 institutions closed their holdings, and 382 reduced their stake. Although data for the first-quarter will not be complete until May 15, given the stock’s strong performance thus far in 2018, it would not be surprising to see the trend continue in the first quarter.

However, what investors and analysts thought, or think today will not matter. It will be what they think after results on May 10, that determines the direction of the stock going forward. The pressure will be on NVIDIA, to beat not only big expectations for this quarter but also beat the big expectations for next quarter’s guidance.

Investors have a lot at stake when the company reports results.

By Mark W. Gaffney
For WhaleWisdom.com

As of May 1, 2018, over 5,200 stock positions were held by the 55 funds classified as activist investors. That’s according to data from WhaleWisdom.com. Most of these stocks will be unremarkable performers, generating little alpha for the fund or investors.

But hidden among the many stocks in activist funds’ portfolios are a few positions that will be big winners. Like Shutterfly (Nasdaq: SFLY), an online photo book company which first appeared in the portfolio of the activist hedge fund SpringOwl Associates on November 15, 2017 (13F for quarter ending September 30th, 2017). Following SpringOwl into SFLY at $40, would have led to a 126% gain less than six months later.

A simple strategy designed to identify and profit from the most promising small cap stocks held by activist managers would have averaged 26.3% annually since 2009. That’s a compounded return of over 690% through April of 2018.

Activist managers target companies with share prices viewed as undervalued compared to the true value of the company’s operations and assets. After accumulating a large block of shares in the target company, the activist manager then goes public with a plan to engage management and force corporate changes intended to close the valuation gap and generate profits for the fund.

However, not all public companies held in activist fund portfolios are actively targeted. It seems that the best activist managers also do very well with the passive investments held in their funds.

It’s apparent that independent investors who follow the moves of activists in and out of target stocks can generate substantial profits.

It should come as no surprise that following the investments of activists can be profitable. Academic studies, along with empirical evidence, have shown that on average, activist managers generate positive returns for themselves and their followers. The challenge for investors is zeroing in on the few specific positions most likely to generate significant alpha.

The 13D Activist Fund is in the business of profiting from activist campaigns. The mutual fund manages a portfolio of what it deems the top activist positions. According to its website, the fund has averaged a 15.78% annual total return since its inception in 2012. That’s after annual fees that range from 1.51% to 2.51%. Over the same period the S&P 500’s average total annual return has been 15.11%

While the Activist Fund has produced solid returns, it’s apparent that independent investors who analyze the moves of activists in and out of target stocks can generate substantial profits on their own.

According to Activist Insights, from 2009 through 2017 the total compounded “follower return” of activist investors was about 240%. In 2017, the average follower return from all stocks targeted by activists was 13.2%. That compares to the S&P 500’s total return of 21.8%.

The follower return is based on buying when an activist files a 13D report with the SEC reporting a target position and selling when the activist discloses exiting the position. Of course, to achieve the average follower return investors would have had to invest in every one of the nearly 800 13Ds filed by activists last year. Good luck with that…

Using WhaleWisdom.com’s 13F backtester, I was able to create a simple hypothetical activist-following strategy that generated a 26.3% annualized return since 2009 following all of the famous activists managers, as well as some more obscure activist managers. This strategy holds a portfolio of 10 stocks which represent the activists’ highest conviction positions. It rebalances four times a year — not an onerous task.

Here are some unique aspects of this strategy:

Many top performing activist managers are not famous.

I reduced the 55 funds WhaleWisdom categorizes as activist investors to 25, by eliminating very small funds with less than $100 million under management. I also excluded funds holding fewer than 11 positions and more than 100 positions. I further reduced the list by deleting a handful of funds with the worst historical performance. Below are the funds I was left with. Most of these activists are widely known, but some are more obscure, despite having shown good performance.

Using WhaleWisdon’s backtester, I created a portfolio of the top 10 positions held by these leading funds. I chose the “combined percent of portfolio rebalancing option” for rebalancing this portfolio. So, if stock XYZ represents 15% of fund A’s portfolio and 20% of fund B’s portfolio, then XYZ is 35% of the combined fund holdings. The top 10 combined holdings are then equally weighted, with each one comprising 10% of the portfolio.

The activist portfolio is rebalanced quarterly based on new 13F filings. 13F reports are mandated by the SEC — all funds managing $100 million or more must disclose their long positions within 45 days after the end of a quarter. You can find more information on 13F filings here.

Buying right after a 13D filing typically means chasing a stock that has surged higher in recent days.

Most activist followers only focus on 13D filings. Once an activist acquires 5% or more of a public company, it must file a 13D disclosing this holding within 10 calendar days. Investors keen on replicating activists’ positions typically buy as soon as possible after the 13D filing.

However, buying immediately after a 13D announcement typically means chasing a stock that has surged higher in recent days.

The price of an activist targeted stock typically rises in the days before a 13D is filed.  Whatever the reason – the activist’s buying driving shares higher, insiders catching word of the upcoming filing, or a combination of factors – target stocks usually go up just before a 13D activist filing. Then comes the 13D announcement, and the price spikes even higher. Depending on many factors, including the notoriety of the activist and market conditions, a target stock can climb 10%, 20% or even more from the period days before a 13D disclosure to the day after the filing.

So, chasing an activist-targeted stock following a 13D filing usually means you’re buying into strength. Likewise, selling into weakness after an activist discloses its exit is a problem. When investors learn an activist has sold a position, there’s typically wholesale selling. Buying into price strength and selling into price weakness are not ideal entries and exits, and can destroy the alpha of a strategy.

The WhaleWisdom activist strategy gains an advantage by entering activist-followed positions quarterly when 13Fs are filed. Reactions to 13F filings are typically muted, so basing entries on 13Fs tends to avoid the volatility associated with 13D filings.

I’ll also emphasize that activist funds typically have significant non-activist holdings. Given that top activist managers are astute appraisers of value, it’s no shock that leading activists’ non-13D holdings may perform very well. Following activists’ 13F filings appears to be more profitable than following their 13D filings.

Below is a graph showing the performance of a 10-stock equally-weighted portfolio combining the top 13F holdings of the 25 best activist funds. The portfolio is rebalanced 46 days after each quarter’s end. The light green is the activist portfolio total return, the dark green the S&P 500 total return.

Since 2009, the hypothetical strategy has a cumulative total return of 690.6%, 2.68X the S&P 500’s total return. Note that standard deviation of returns is 17.8% for the WhaleWisdom activist strategy compared to 12% for the S&P 500. So, this strategy would have achieved almost triple the S&P 500’s performance with only 50% more volatility.

I’ve tweaked this strategy in a few small ways: I’ve excluded the ticker IEP from the backtest. That’s the symbol for Icahn Enterprises L.P. common stock. It kept popping up in the portfolio, and I decided I’d rather invest in Icahn’s picks and not his fund. Also, I’ve eliminated MSFT, FB and all ETFs, as I can get exposure to these securities elsewhere. WhaleWisdom allows the user to exclude any number of tickers from the backtest.

There’s one more change we can make that may result in even better results.

The next chart reflects one alteration to the above strategy: We restrict the stocks purchased to between $250 million and $2 billion market cap. We don’t invest in mid-cap to mega cap stocks with market caps of $2B and higher.

Also, we skip the micro-cap stocks with less than $250 million market cap.

The WhaleWisdom activist small cap strategy showed a total return of 894.2% since 2009 — 3.49X the S&P 500 total return. Standard deviation was 21.5% vs 12%.

Backtesting this small cap activist strategy back to 2001 shows equally impressive performance — a 21.6% annualized return and a cumulative return of 2705%.  The period coming out of the 2008 downturn was very strong for small cap stocks that had been decimated in the bear market.

Will these activist strategies based on 13F filings perform in the future like the historical backtests? That’s the million-dollar question.  However, the best activists are skilled value investors, adept at finding cheap companies and closing the valuation gap by forcing corporate change. This is a formula that has worked for decades and is likely to work into the future, though it’s not immune to bear markets.

I encourage anyone interested in activist investing strategies to test their own ideas for uncovering hidden opportunities in the 13F filings of activist investors.

Acadia Pharmaceutical Inc.’s (ACAD) stock has been pummeled during the first four months of 2018, with the stock down nearly 46 percent on the year, and nearly 58 percent off its highs over the past 52-weeks. The company has come under scrutiny after CNN reported that Acadia’s only marketable drug, Nuplazid for the treatment of Parkinson’s disease psychosis (PDP), was responsible for hundreds of deaths, resulting in shares plummeting on the news.

Acadia’s upper management has a very different point regarding CNN’s reporting, with members of the upper management all choosing to exercise stock options on April 18, when shares were trading below $20. However, management did not exercise the options, and then sell them, no, they exercised those options and acquired the stock, choosing to hold the shares, in what appears to be a vote of confidence.

Insider Transactions

Insider transactions reported on form 4’s can often be a good indication of just what a management team or directors think about the valuation of their company. Sometimes during a time of turmoil, watching the transactions insiders are making can send clues about what management or directors think about a stock price, and where it is heading.

Management Buys Shares

Acadia’s management sent a convincing statement, putting their money where their mouth is, with several upper management team member exercising stock options, and not disposing of them, but acquiring them and holding the shares. The Chief Executive Officer, Executive Vice President and General Counsel, Chief Financial Officer, Chief Commercial Officer, and Head of R&D, all did just that, acquiring a total of about 325,000 shares of stock, at a price of $19.98, about $6.5 million.

Bad Press

The management stepped up in a period of adversity after a CNN article, cited a database called the FDA’s Adverse Event Reporting System (FAERS), noting a total of 712 reported deaths in connection to Acadia’s drug, Nuplazid, the only drug approved for the treatment of PDP.

The drug has been on the market since May of 2016 after the FDA approved the drug for the indication. Patients who have psychosis, associated with Parkinson’s are typically at a very advanced stage of the disease and face a high mortality rate. The database, however, does not state the drug is the cause of the death, only that the drug was one of the drugs the patient was taking at the time. The data also show there are many different types of adverse events reported, with no one clear connection to the drug.

CNN later came out and reported again on April 25, that the FDA was going to re-examine the drug sparking a controversy, that the drug may even get pulled from the market, causing share to plunge even further.

Acadia’s Response

Acadia stated on April 27 that Nuplazid is safe and efficacious while releasing new data from recent studies to support the claim. The company also noted that patients taking Nuplazid, are at advanced stages of the illness, with a very high mortality rate. The company also reported the FDA had made no changes regarding the current status of the drug.

The debate may still rage about the safety over the drug, but one thing seems clear, management, for now, is not backing down.

By Mark W. Gaffney
For WhaleWisdom.com

On December 8, 2017 Iroquois Capital Management filed a 13G report with the SEC stating that it owned 3,575,583 shares of Pareteum Corporation (NYSE: TEUM). For several days after the investment fund’s public disclosure TEUM hovered around $0.75, but soon it’s price began climbing. Then on December 26, Pareteum announced in a press release that it had:

“…completed development enabling it to add support of Blockchain technology to its billing and settlement services. This newest service capability enables Pareteum customers to participate in the transformational ‘Digital Economy Monetization to the Cloud’ and now accept and process Bitcoin, Ethereum, Litecoin, Airtokens and other forms of cryptocurrencies.”

The stock hit $3.39 on January 3. After considerable volatility, TEUM shares were recently trading around $2.70.

Iroquois’ purchase just weeks before Pareteum’s major announcement was fortuitous. Obviously, the fund’s principals had unique insights that led them to invest over $2.6 million in a seventy-cent stock.

For investors interested in blockchain and cryptocurrency-related equities, SEC filings offer a wealth of information. While it’s not always the case, “Whales” — professional investors who manage millions and even billions of dollars – often have knowledge about public companies not available to the public. Hedge Funds and other institutional managers spend large sums on research and have the clout to meet face-to-face with company management. Analyzing the moves of these “smart money” investors can be very profitable for investors.

An investor or investment group is required to file a 13G within 10 calendar days of acquiring 5% or more of a public company. While 13G filings are for passive investments, 5% acquirers that intend to engage management and actively increase shareholder value must submit 13D filings. Both of these reports are available publicly at the SEC’s Edgar site or at services like WhaleWisdom.com.

“Whales” — professional investors who manage millions and even billions of dollars – often have knowledge about public companies not available to the public.

Now obviously not every 13G or 13D filing will presage 400%+ price gains. Investors would be well advised to use smart money filings as a starting point for more research, particularly on the identity of the filer. It’s one thing if Warren Buffett files a 13G on a company — many of us would follow him into that stock, no questions asked.  But it’s quite another matter if a pump-and-dump artist is acquiring shares looking to scam a quick profit. We’d probably want to avoid that stock like the plague. Or maybe look into shorting it and profiting from its inevitable collapse…

Another SEC filing that Crypto-focused investors can use for profitable ideas are 13F filings.  The SEC requires that funds with over $100 million in AUM disclose their complete holdings quarterly. While 13Ds and 13Gs are filed within 10 days after an entity acquires 5% ownership, 13Fs must be filed within 45 days after the end of every quarter. So, the positions of every U.S. investment fund with $100 million under management are published every three months.

Below is a table reflecting combined 13F and 13G filings for select blockchain-related stocks for Q3 of 2017 through the present. The table shows which popular crypto stocks were recently being accumulated by institutional managers. While most of the holdings show 13F at the end of 2017, several stocks also reflect more recent purchases via 13G and 13D filings. The table shows that Pareteum Corp, Social Realty Inc., Riot Blockchain and Bitcoin Investment Trust all had big gains in holdings and increased numbers of funds disclosing investments.

Also, we see that LongFin Corp (Nasdaq: LFIN) had picked-up a few large investors as of year-end. In February that company filed a 13D disclosing  42,150,000 shares of LFIN were held by Meenavalli Venkata. On April 6, the SEC froze trading in LFIN and accused Venkata, along with other company officials, with the illegal sale of restricted securities. The SEC’s press release can be found here. Venkata would not be the kind of Buffett-like manager one would have followed blindly into LFIN.

Note that 13Fs for Q1 of 2018 must be filed by May 15. It will be interesting to see to what extent big investors took advantage of the 1^st quarter correction to buy blockchain stocks.

Blockchain-related equities combined 13F/D/G holdings – recent changes in positions by large investment funds.

Source: WhaleWisdom.com

Keep in mind that there are some limitations to 13F analysis: For one thing, the 45-day filing delay after quarter-end means one is analyzing holdings from weeks ago — the fund could have changed its portfolio significantly since then. Also, only stocks that trade on the major U.S. Exchanges qualify as 13F stocks – OTC-traded stocks do not have to be included in 13F filings. The same goes for short positions, commodities and futures: none of these are reflected in 13F portfolios. So, while George Soros may hold a big chunk of Overstock.com (Nasdaq: OSTK) his fund might also be short other blockchain-related stocks as a hedge, positions he doesn’t have to disclose.

Still, 13F analysis can yield valuable information — especially for investors with a somewhat longer time horizon. The great investment managers rarely trade out of positions quarterly, rather they build positions in outstanding companies over time – often years. Investors who mimic the positions of the elite managers typically lose little by delaying purchases and may actually acquire shares at cheaper prices.

Blockchain is a technology in its infancy, and the stocks surging and capturing headlines today may not be the companies that survive and prosper in the months and years ahead. By studying SEC filings and the tracking the moves of professional money managers, blockchain equity investors may gain an edge distinguishing the contenders from the pretenders.