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We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds' top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL).
Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) was in 12 hedge funds' portfolios at the end of June. MDGL shareholders have witnessed a decrease in support from the world's most elite money managers in recent months. There were 19 hedge funds in our database with MDGL holdings at the end of the previous quarter. Our calculations also showed that MDGL 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.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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 recent hedge fund action regarding Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL).
How have hedgies been trading Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL)?
At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -37% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MDGL over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Baker Bros. Advisors was the largest shareholder of Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL), with a stake worth $122.6 million reported as of the end of March. Trailing Baker Bros. Advisors was Healthcor Management LP, which amassed a stake valued at $108.2 million. Armistice Capital, venBio Select Advisor, and Rock Springs Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Since Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) has witnessed bearish sentiment from the smart money, it's safe to say that there was a specific group of funds that elected to cut their entire stakes in the second quarter. It's worth mentioning that Principal Global Investors's Columbus Circle Investors cut the biggest investment of all the hedgies monitored by Insider Monkey, valued at about $6.9 million in stock, and Brian Ashford-Russell and Tim Woolley's Polar Capital was right behind this move, as the fund cut about $6.3 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 7 funds in the second quarter.
Let's now review hedge fund activity in other stocks similar to Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL). These stocks are Whiting Petroleum Corporation (NYSE:WLL), ForeScout Technologies, Inc. (NASDAQ:FSCT), Redwood Trust, Inc. (NYSE:RWT), and IAMGOLD Corporation (NYSE:IAG). This group of stocks' market values resemble MDGL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WLL,23,280994,-2 FSCT,18,191567,-5 RWT,13,97744,-2 IAG,15,150001,2 Average,17.25,180077,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $180 million. That figure was $360 million in MDGL's case. Whiting Petroleum Corporation (NYSE:WLL) is the most popular stock in this table. On the other hand Redwood Trust, Inc. (NYSE:RWT) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) is even less popular than RWT. Hedge funds dodged a bullet by taking a bearish stance towards MDGL. 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 MDGL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MDGL investors were disappointed as the stock returned -17.7% 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.
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