Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Magic Software Enterprises Ltd. (NASDAQ:MGIC).
Magic Software Enterprises Ltd. (NASDAQ:MGIC) has seen a decrease in activity from the world’s largest hedge funds in recent months. MGIC was in 2 hedge funds’ portfolios at the end of the third quarter of 2019. There were 3 hedge funds in our database with MGIC holdings at the end of the previous quarter. Our calculations also showed that MGIC isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Let’s analyze the fresh hedge fund action encompassing Magic Software Enterprises Ltd. (NASDAQ:MGIC).
What does smart money think about Magic Software Enterprises Ltd. (NASDAQ:MGIC)?
Heading into the fourth quarter of 2019, a total of 2 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MGIC over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Magic Software Enterprises Ltd. (NASDAQ:MGIC) was held by Renaissance Technologies, which reported holding $4.1 million worth of stock at the end of September. It was followed by Driehaus Capital with a $0.8 million position.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Arrowstreet 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 none of the 750+ hedge funds tracked by Insider Monkey identified MGIC as a viable investment and initiated a position in the stock.
Let’s go over hedge fund activity in other stocks similar to Magic Software Enterprises Ltd. (NASDAQ:MGIC). These stocks are Vista Oil & Gas, S.A.B. de C.V. (NYSE:VIST), Haynes International, Inc. (NASDAQ:HAYN), Central Puerto S.A. (NYSE:CEPU), and AVROBIO, Inc. (NASDAQ:AVRO). This group of stocks’ market valuations are similar to MGIC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VIST | 8 | 65440 | 8 |
| HAYN | 15 | 55569 | 5 |
| CEPU | 7 | 10037 | -2 |
| AVRO | 11 | 117439 | 2 |
| Average | 10.25 | 62121 | 3.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $62 million. That figure was $5 million in MGIC’s case. Haynes International, Inc. (NASDAQ:HAYN) is the most popular stock in this table. On the other hand Central Puerto S.A. (NYSE:CEPU) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Magic Software Enterprises Ltd. (NASDAQ:MGIC) is even less popular than CEPU. Hedge funds clearly dropped the ball on MGIC as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. A small number of hedge funds were also right about betting on MGIC as the stock returned 11.8% during the fourth quarter (through 11/22) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
