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Did Hedge Funds Drop The Ball On Methode Electronics Inc. (MEI) ?

Abigail Fisher

How do we determine whether Methode Electronics Inc. (NYSE:MEI) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Methode Electronics Inc. (NYSE:MEI) was in 8 hedge funds' portfolios at the end of June. MEI investors should pay attention to a decrease in support from the world's most elite money managers of late. There were 10 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 (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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.

MEI_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, 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 analyze the fresh hedge fund action surrounding Methode Electronics Inc. (NYSE:MEI).

What does smart money think about Methode Electronics Inc. (NYSE:MEI)?

At the end of the second quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MEI over the last 16 quarters. With the smart money's sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Ken Griffin CITADEL INVESTMENT GROUP

Of the funds tracked by Insider Monkey, Ariel Investments, managed by John W. Rogers, holds the biggest position in Methode Electronics Inc. (NYSE:MEI). Ariel Investments has a $26 million position in the stock, comprising 0.3% of its 13F portfolio. Coming in second is Renaissance Technologies, with a $23.3 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other peers that hold long positions consist of Chuck Royce's Royce & Associates, Israel Englander's Millennium Management and Ken Griffin's Citadel Investment Group.

Since Methode Electronics Inc. (NYSE:MEI) has faced falling interest from the entirety of the hedge funds we track, it's easy to see that there exists a select few fund managers that elected to cut their full holdings in the second quarter. Interestingly, David Harding's Winton Capital Management dumped the biggest stake of the 750 funds tracked by Insider Monkey, totaling an estimated $0.6 million in stock, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital was right behind this move, as the fund dumped about $0.4 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 2 funds in the second quarter.

Let's go over hedge fund activity in other stocks similar to Methode Electronics Inc. (NYSE:MEI). We will take a look at MTS Systems Corporation (NASDAQ:MTSC), Abercrombie & Fitch Co. (NYSE:ANF), Camping World Holdings, Inc. (NYSE:CWH), and NanoString Technologies Inc (NASDAQ:NSTG). All of these stocks' market caps are closest to MEI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MTSC,12,125808,2 ANF,26,124297,1 CWH,9,106511,-1 NSTG,20,210626,-2 Average,16.75,141811,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $142 million. That figure was $87 million in MEI's case. Abercrombie & Fitch Co. (NYSE:ANF) is the most popular stock in this table. On the other hand Camping World Holdings, Inc. (NYSE:CWH) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Methode Electronics Inc. (NYSE:MEI) is even less popular than CWH. 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on MEI as the stock returned 18.2% during the third quarter and outperformed the market by an even larger margin.

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

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