Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.7% in the 12 months ending October 26 (including dividend payments). Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of June 2014) generated a return of 15.1% during the same 12-month period, with 53% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL).
Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) was in 26 hedge funds’ portfolios at the end of September. MDGL has seen an increase in support from the world’s most elite money managers of late. There were 21 hedge funds in our database with MDGL holdings at the end of the previous quarter. Our calculations also showed that MDGL isn’t among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let’s take a peek at the key hedge fund action regarding Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL).
What does the smart money think about Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL)?
At Q3’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MDGL over the last 13 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 Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) was held by Baker Bros. Advisors, which reported holding $250.4 million worth of stock at the end of September. It was followed by venBio Select Advisor with a $99.1 million position. Other investors bullish on the company included Rock Springs Capital Management, Healthcor Management LP, and Point72 Asset Management.
Now, specific money managers were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, established the most valuable position in Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL). Point72 Asset Management had $20.3 million invested in the company at the end of the quarter. Steven Boyd’s Armistice Capital also initiated a $17.1 million position during the quarter. The following funds were also among the new MDGL investors: Jeffrey Jay and David Kroin’s Great Point Partners, Principal Global Investors’s Columbus Circle Investors, and Paul Marshall and Ian Wace’s Marshall Wace LLP.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) but similarly valued. We will take a look at Ellie Mae Inc (NYSE:ELLI), Guangshen Railway Co. Ltd (NYSE:GSH), ACI Worldwide Inc (NASDAQ:ACIW), and GATX Corporation (NYSE:GATX). This group of stocks’ market valuations match MDGL’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ELLI | 15 | 613258 | 2 |
| GSH | 1 | 4749 | 0 |
| ACIW | 15 | 298192 | -2 |
| GATX | 11 | 267813 | 1 |
| Average | 10.5 | 296003 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $296 million. That figure was $576 million in MDGL’s case. Ellie Mae Inc (NYSE:ELLI) is the most popular stock in this table. On the other hand Guangshen Railway Co. Ltd (NYSE:GSH) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.
Disclosure: None. This article was originally published at Insider Monkey.
