Were Hedge Funds Right About Selling Methode Electronics Inc. (MEI)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtMethode Electronics Inc. (NYSE:MEI) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Methode Electronics Inc. (NYSE:MEI) investors should be aware of a decrease in hedge fund sentiment of late. Our calculations also showed that MEI 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

John Rogers of Ariel Investments

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 15 largest gold producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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 view the fresh hedge fund action surrounding Methode Electronics Inc. (NYSE:MEI).

Hedge fund activity in Methode Electronics Inc. (NYSE:MEI)

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. By comparison, 10 hedge funds held shares or bullish call options in MEI a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Methode Electronics Inc. (NYSE:MEI) was held by Ariel Investments, which reported holding $24.8 million worth of stock at the end of September. It was followed by Royce & Associates with a $14.7 million position. Other investors bullish on the company included Arrowstreet Capital, Renaissance Technologies, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Ariel Investments allocated the biggest weight to Methode Electronics Inc. (NYSE:MEI), around 0.44% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.2 percent of its 13F equity portfolio to MEI.

Since Methode Electronics Inc. (NYSE:MEI) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there exists a select few money managers who sold off their positions entirely heading into Q4. At the top of the heap, Israel Englander’s Millennium Management dumped the biggest stake of all the hedgies monitored by Insider Monkey, valued at about $9.7 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund said goodbye to about $0.7 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 1 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Methode Electronics Inc. (NYSE:MEI) but similarly valued. We will take a look at Meritor Inc (NYSE:MTOR), CSW Industrials, Inc. (NASDAQ:CSWI), Kronos Worldwide, Inc. (NYSE:KRO), and Mesa Laboratories, Inc. (NASDAQ:MLAB). All of these stocks’ market caps are similar to MEI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $77 million. That figure was $72 million in MEI’s case. Meritor Inc (NYSE:MTOR) is the most popular stock in this table. On the other hand Mesa Laboratories, Inc. (NASDAQ:MLAB) is the least popular one with only 7 bullish hedge fund positions. Methode Electronics Inc. (NYSE:MEI) 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 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 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately MEI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MEI investors were disappointed as the stock returned 17.8% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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