Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Methode Electronics Inc. (NYSE:MEI).
Methode Electronics Inc. (NYSE:MEI) has experienced an increase in hedge fund sentiment lately. MEI was in 11 hedge funds’ portfolios at the end of the third quarter of 2019. There were 8 hedge funds in our database with MEI holdings at the end of the previous quarter. Our calculations also showed that MEI 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.
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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s review the latest hedge fund action encompassing Methode Electronics Inc. (NYSE:MEI).
What have hedge funds been doing with Methode Electronics Inc. (NYSE:MEI)?
At Q3’s end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38% from the second quarter of 2019. On the other hand, there were a total of 11 hedge funds with a bullish position 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.
When looking at the institutional investors followed by Insider Monkey, Ariel Investments, managed by John W. Rogers, holds the most valuable position in Methode Electronics Inc. (NYSE:MEI). Ariel Investments has a $30.9 million position in the stock, comprising 0.4% of its 13F portfolio. The second most bullish fund manager is Chuck Royce of Royce & Associates, with a $22.8 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Other peers that are bullish consist of Renaissance Technologies, Israel Englander’s Millennium Management and Ken Griffin’s 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 0.41% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, dishing out 0.21 percent of its 13F equity portfolio to MEI.
Consequently, specific money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the biggest position in Methode Electronics Inc. (NYSE:MEI). Arrowstreet Capital had $6.2 million invested in the company at the end of the quarter. Cliff Asness’s AQR Capital Management also made a $0.6 million investment in the stock during the quarter. The only other fund with a new position in the stock is Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.
Let’s now take a look at hedge fund activity in other stocks similar to Methode Electronics Inc. (NYSE:MEI). We will take a look at Saul Centers Inc (NYSE:BFS), Air Transport Services Group Inc. (NASDAQ:ATSG), Materion Corporation (NYSE:MTRN), and Centennial Resource Development, Inc. (NASDAQ:CDEV). This group of stocks’ market values resemble MEI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BFS | 12 | 43790 | 3 |
| ATSG | 17 | 158207 | 2 |
| MTRN | 17 | 107442 | 2 |
| CDEV | 28 | 232973 | 11 |
| Average | 18.5 | 135603 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $136 million. That figure was $109 million in MEI’s case. Centennial Resource Development, Inc. (NASDAQ:CDEV) is the most popular stock in this table. On the other hand Saul Centers Inc (NYSE:BFS) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Methode Electronics Inc. (NYSE:MEI) is even less popular than BFS. Hedge funds clearly dropped the ball on MEI as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on MEI as the stock returned 11% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
