How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Magna International Inc. (NYSE:MGA) and determine whether hedge funds had an edge regarding this stock.
Magna International Inc. (NYSE:MGA) investors should pay attention to a decrease in enthusiasm from smart money of late. Magna International Inc. (NYSE:MGA) was in 19 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 43. Our calculations also showed that MGA isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Gavin Saitowitz of Prelude Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let's check out the key hedge fund action regarding Magna International Inc. (NYSE:MGA).
Hedge fund activity in Magna International Inc. (NYSE:MGA)
At the end of the second quarter, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in MGA a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Arrowstreet Capital was the largest shareholder of Magna International Inc. (NYSE:MGA), with a stake worth $235.5 million reported as of the end of September. Trailing Arrowstreet Capital was Citadel Investment Group, which amassed a stake valued at $43.5 million. East Side Capital (RR Partners), D E Shaw, and GLG Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position East Side Capital (RR Partners) allocated the biggest weight to Magna International Inc. (NYSE:MGA), around 6.76% of its 13F portfolio. Heathbridge Capital Management is also relatively very bullish on the stock, dishing out 4.83 percent of its 13F equity portfolio to MGA.
Because Magna International Inc. (NYSE:MGA) has witnessed declining sentiment from the smart money, it's safe to say that there exists a select few funds that decided to sell off their positions entirely last quarter. Intriguingly, Ray Dalio's Bridgewater Associates said goodbye to the biggest investment of the 750 funds monitored by Insider Monkey, comprising close to $2.9 million in stock. Richard SchimeláandáLawrence Sapanski's fund, Cinctive Capital Management, also sold off its stock, about $2.8 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 3 funds last quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Magna International Inc. (NYSE:MGA) but similarly valued. These stocks are Leidos Holdings Inc (NYSE:LDOS), Wix.Com Ltd (NASDAQ:WIX), Masco Corporation (NYSE:MAS), The Liberty SiriusXM Group (NASDAQ:LSXMA), Western Digital Corporation (NASDAQ:WDC), MongoDB, Inc. (NASDAQ:MDB), and Tradeweb Markets Inc. (NASDAQ:TW). This group of stocks' market valuations resemble MGA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LDOS,35,617234,5 WIX,27,1258178,-2 MAS,40,827096,6 LSXMA,46,1294569,-2 WDC,49,583698,4 MDB,37,1248081,7 TW,33,346714,3 Average,38.1,882224,3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.1 hedge funds with bullish positions and the average amount invested in these stocks was $882 million. That figure was $467 million in MGA's case. Western Digital Corporation (NASDAQ:WDC) is the most popular stock in this table. On the other hand Wix.Com Ltd (NASDAQ:WIX) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Magna International Inc. (NYSE:MGA) is even less popular than WIX. Our overall hedge fund sentiment score for MGA is 15.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds dodged a bullet by taking a bearish stance towards MGA. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September but managed to beat the market by 19.3 percentage points. Unfortunately MGA wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); MGA investors were disappointed as the stock returned 3.5% in 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.