Did Hedge Funds Make The Right Call On MDU Resources Group Inc (MDU) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding MDU Resources Group Inc (NYSE:MDU) and determine whether hedge funds had an edge regarding this stock.

Is MDU Resources Group Inc (NYSE:MDU) a bargain? The smart money was getting less optimistic. The number of long hedge fund bets dropped by 5 lately. Our calculations also showed that MDU 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). MDU was in 25 hedge funds’ portfolios at the end of March. There were 30 hedge funds in our database with MDU positions at the end of the previous quarter.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ken Griffin of Citadel Investment Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind let’s take a gander at the recent hedge fund action encompassing MDU Resources Group Inc (NYSE:MDU).

What have hedge funds been doing with MDU Resources Group Inc (NYSE:MDU)?

Heading into the second quarter of 2020, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in MDU over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in MDU Resources Group Inc (NYSE:MDU), which was worth $37.1 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $32.5 million worth of shares. Citadel Investment Group, GLG Partners, and Arrowstreet Capital 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 Intrinsic Edge Capital allocated the biggest weight to MDU Resources Group Inc (NYSE:MDU), around 1.15% of its 13F portfolio. Centenus Global Management is also relatively very bullish on the stock, dishing out 0.84 percent of its 13F equity portfolio to MDU.

Due to the fact that MDU Resources Group Inc (NYSE:MDU) has faced a decline in interest from hedge fund managers, we can see that there was a specific group of hedge funds that decided to sell off their positions entirely last quarter. It’s worth mentioning that Phill Gross and Robert Atchinson’s Adage Capital Management dumped the largest position of the “upper crust” of funds watched by Insider Monkey, comprising about $44.6 million in stock. Brian Olson, Baehyun Sung, and Jamie Waters’s fund, Blackstart Capital, also said goodbye to its stock, about $7.5 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 5 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to MDU Resources Group Inc (NYSE:MDU). These stocks are Science Applications International Corp (NYSE:SAIC), JOYY Inc. (NASDAQ:YY), LPL Financial Holdings Inc (NASDAQ:LPLA), and Cousins Properties Incorporated (NYSE:CUZ). This group of stocks’ market values resemble MDU’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $351 million. That figure was $183 million in MDU’s case. Science Applications International Corp (NYSE:SAIC) is the most popular stock in this table. On the other hand JOYY Inc. (NASDAQ:YY) is the least popular one with only 15 bullish hedge fund positions. MDU Resources Group Inc (NYSE:MDU) is not the least popular stock in this group but hedge fund interest is still below average. 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 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately MDU wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MDU investors were disappointed as the stock returned 4.1% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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