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 Magenta Therapeutics, Inc. (NASDAQ:MGTA) and determine whether hedge funds had an edge regarding this stock.
Is Magenta Therapeutics, Inc. (NASDAQ:MGTA) a healthy stock for your portfolio? Investors who are in the know were getting more optimistic. The number of bullish hedge fund positions went up by 1 lately. Our calculations also showed that MGTA 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).
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.
Kerr Neilson of Platinum Asset Management
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. With all of this in mind let’s take a glance at the fresh hedge fund action regarding Magenta Therapeutics, Inc. (NASDAQ:MGTA).
What have hedge funds been doing with Magenta Therapeutics, Inc. (NASDAQ:MGTA)?
At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from the previous quarter. On the other hand, there were a total of 8 hedge funds with a bullish position in MGTA a year ago. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
More specifically, Casdin Capital was the largest shareholder of Magenta Therapeutics, Inc. (NASDAQ:MGTA), with a stake worth $18.7 million reported as of the end of September. Trailing Casdin Capital was Alkeon Capital Management, which amassed a stake valued at $3.8 million. Opaleye Management, Harvard Management Co, and Platinum Asset Management 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 Casdin Capital allocated the biggest weight to Magenta Therapeutics, Inc. (NASDAQ:MGTA), around 1.98% of its 13F portfolio. Opaleye Management is also relatively very bullish on the stock, designating 0.72 percent of its 13F equity portfolio to MGTA.
Consequently, key money managers were breaking ground themselves. Renaissance Technologies, initiated the most outsized position in Magenta Therapeutics, Inc. (NASDAQ:MGTA). Renaissance Technologies had $1.1 million invested in the company at the end of the quarter. Cliff Asness’s AQR Capital Management also made a $0.1 million investment in the stock during the quarter.
Let’s go over hedge fund activity in other stocks similar to Magenta Therapeutics, Inc. (NASDAQ:MGTA). We will take a look at CAI International Inc (NYSE:CAI), Helix Energy Solutions Group Inc. (NYSE:HLX), Bicycle Therapeutics plc (NASDAQ:BCYC), and Willdan Group, Inc. (NASDAQ:WLDN). All of these stocks’ market caps are similar to MGTA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CAI | 8 | 63669 | -3 |
| HLX | 10 | 6961 | -10 |
| BCYC | 6 | 33717 | 1 |
| WLDN | 6 | 8408 | 3 |
| Average | 7.5 | 28189 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $28 million. That figure was $32 million in MGTA’s case. Helix Energy Solutions Group Inc. (NYSE:HLX) is the most popular stock in this table. On the other hand Bicycle Therapeutics plc (NASDAQ:BCYC) is the least popular one with only 6 bullish hedge fund positions. Magenta Therapeutics, Inc. (NASDAQ:MGTA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 but beat the market by 15.5 percentage points. Unfortunately MGTA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MGTA were disappointed as the stock returned 19.6% during the same time period 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.
