Were Hedge Funds Right About Dumping MGM Growth Properties (MGP)?

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds.

Is MGM Growth Properties LLC (NYSE:MGP) a bargain? Prominent investors are reducing their bets on the stock. The number of bullish hedge fund bets dropped by 3 lately. Our calculations also showed that MGP isn’t among the 30 most popular stocks among hedge funds (see the video below). MGP was in 14 hedge funds’ portfolios at the end of June. There were 17 hedge funds in our database with MGP positions at the end of the previous quarter.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a peek at the new 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 second quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MGP over the last 16 quarters. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, Echo Street Capital Management was the largest shareholder of MGM Growth Properties LLC (NYSE:MGP), with a stake worth $53.3 million reported as of the end of March. Trailing Echo Street Capital Management was Zimmer Partners, which amassed a stake valued at $46.8 million. Citadel Investment Group, Millennium Management, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that MGM Growth Properties LLC (NYSE:MGP) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there exists a select few hedge funds who sold off their positions entirely last quarter. Intriguingly, Jeffrey Talpins’s Element Capital Management sold off the biggest position of all the hedgies followed by Insider Monkey, comprising an estimated $4.9 million in stock. David Costen Haley’s fund, HBK Investments, also sold off its stock, about $1.2 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to MGM Growth Properties LLC (NYSE:MGP). These stocks are Packaging Corporation Of America (NYSE:PKG), Whirlpool Corporation (NYSE:WHR), Black Knight, Inc. (NYSE:BKI), and Lamb Weston Holdings, Inc. (NYSE:LW). This group of stocks’ market valuations resemble MGP’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $586 million. That figure was $291 million in MGP’s case. Black Knight, Inc. (NYSE:BKI) is the most popular stock in this table. On the other hand Whirlpool Corporation (NYSE:WHR) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks MGM Growth Properties LLC (NYSE:MGP) is even less popular than WHR. Hedge funds dodged a bullet by taking a bearish stance towards MGP. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MGP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MGP investors were disappointed as the stock returned -0.4% during the third 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 many of these stocks already outperformed the market so far in 2019.

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