Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
MGM Growth Properties LLC (NYSE:MGP) investors should pay attention to an increase in hedge fund interest recently. Our calculations also showed that MGP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 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.
Clifton S. Robbins of Blue Harbour Group
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to analyze the recent hedge fund action encompassing MGM Growth Properties LLC (NYSE:MGP).
Hedge fund activity in MGM Growth Properties LLC (NYSE:MGP)
At the end of the third quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in MGP a year ago. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Greg Poole’s Echo Street Capital Management has the most valuable position in MGM Growth Properties LLC (NYSE:MGP), worth close to $70.9 million, amounting to 1.2% of its total 13F portfolio. The second largest stake is held by Millennium Management, led by Israel Englander, holding a $56.2 million position; 0.1% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that are bullish consist of Clifton S. Robbins’s Blue Harbour Group, Ken Griffin’s Citadel Investment Group and Renaissance Technologies. In terms of the portfolio weights assigned to each position BlueMar Capital Management allocated the biggest weight to MGM Growth Properties LLC (NYSE:MGP), around 3.93% of its 13F portfolio. Blue Harbour Group is also relatively very bullish on the stock, setting aside 2.35 percent of its 13F equity portfolio to MGP.
Now, some big names were breaking ground themselves. Blue Harbour Group, managed by Clifton S. Robbins, established the most valuable position in MGM Growth Properties LLC (NYSE:MGP). Blue Harbour Group had $40.1 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $15.1 million position during the quarter. The other funds with brand new MGP positions are Eduardo Abush’s Waterfront Capital Partners, David Harding’s Winton Capital Management, and Noam Gottesman’s GLG Partners.
Let’s also examine hedge fund activity in other stocks similar to MGM Growth Properties LLC (NYSE:MGP). These stocks are Fair Isaac Corporation (NYSE:FICO), Huntington Ingalls Industries Inc (NYSE:HII), WEX Inc (NYSE:WEX), and Medical Properties Trust, Inc. (NYSE:MPW). This group of stocks’ market caps are similar to MGP’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FICO | 40 | 873383 | 6 |
| HII | 19 | 589653 | -4 |
| WEX | 25 | 474044 | -6 |
| MPW | 12 | 241800 | -1 |
| Average | 24 | 544720 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $545 million. That figure was $308 million in MGP’s case. Fair Isaac Corporation (NYSE:FICO) is the most popular stock in this table. On the other hand Medical Properties Trust, Inc. (NYSE:MPW) is the least popular one with only 12 bullish hedge fund positions. MGM Growth Properties LLC (NYSE:MGP) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MGP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MGP investors were disappointed as the stock returned 3.1% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
